[Click here to watch the full conversation on The State We’re In]
By Rosemary Ford and Caitlin Agnew
This article has been edited for length and clarity.
What’s going on with the economy? It seems a lot like typical New England weather lately — wait awhile, and it might change. But how do changes like tariffs, inflation and stock market fluctuations — and the ones coming down the pike — affect your wallet? Here to discuss that is Dr. Marie Duggan, professor of business management at Keene State College.
Melanie Plenda:
Let’s start with tariffs. What are they exactly, and why do they matter?
Marie Duggan:
Tariffs are a tax on an import. Recently, my students and I were looking at Apple and the iPhone 16. The Wall Street Journal had a little article about it — it was selling in the United States for $1,100 and it cost $550 to make, mostly in Asia.
On the day we were looking, the tariffs were 54% and that was going to raise the selling cost of making the product to $850, so you would have the original $550 that was the cost of making the iPhone in China before the tariffs, then you have an extra $300, which is this tax that importers have to pay. So Apple, importing the phone to the United States, would pay the $300 to the U.S. government. The question comes up: Would Apple accept a lower profit margin,or would they pass the increase on to customers by raising the selling price from $1,100 to $1,400? So that's kind of how a tariff works.
One of the reasons the United States wanted to put tariffs in place is because we've really had a skyrocketing situation with our national debt in the past, really the past 15 years, and we either have to raise taxes, especially on the rich, who are the people that have most of the money. We can't really cut spending more than we already have. It seemed to some people like a good loophole to create this tax on imports, and that would be a way for the government to amass more money, and it would also tend to make companies such as Apple reconsider their decision to make the product overseas and to consider making more parts of it in the United States. It seemed like a win-win in that situation.
Melanie Plenda:
What do they have to do with the trade deficit? And what exactly is a trade deficit?
Marie Duggan:
A trade deficit is exports minus imports. Exports are things we build in the United States and sell to other countries. Here in Cheshire County, we build a machine called the diamond turning machine, and it is used to make touchscreens. We don't make touchscreens here, but we make the machine that makes touchscreens. The touchscreens are often made in Asia, so we make these machines here, and we export them around the world. We sell them to people in other countries.
When we look at the amount we export minus the amount we import, we get to the trade deficit. It's basically like you earn foreign exchange when you sell exports and you spend foreign exchange when you buy imports. Of course, I personally don't have to spend Chinese yuan when I go to buy an iPhone, but Apple does. Apple has to pay and they ask us to pay people in China through some point in their supply chain.
So what happens if there's a gap? Well, if there's a gap, you have to borrow from the rest of the world. In the same way, if I have my income and I have repairs to my house that exceed my income, I'm going to have to go borrow a loan to solve the problem. If we export less than we import, we're going to run a trade deficit, and we're going to have to borrow from the rest of the world to plug the hole. We borrow tremendous amounts from the rest of the world. You might not be really aware of that, because the borrowing comes in kind of funny forms. Yes, sometimes foreigners buy U.S. Treasuries or they buy stocks and bonds. But even when I go to get a loan from the bank, say, for a new car, a lot of the money that's in the banking system may be coming from Japan or China or Saudi Arabia. It's just a giant swimming pool full of money in our banking system that we're lending out to people, and a good bit of the money comes from other countries.
Melanie Plenda:
Before President Trump, how would you describe the United States’ approach to tariffs?
Marie Duggan:
Well, I would say that our approach to tariffs actually started to shift in 2016 with the first Trump election, but Joe Biden also had a different approach to tariffs than other Democratic presidents had.
Prior to the Obama era, the Clinton era, the George Bush era, going back many decades, the United States believed in having no tariffs. The argument was that it was a wonderful position to have if you're the world's leading exporter. So this was a position the United States came up with between 1945 and 1973, when we were the world's leading exporter. We wanted nobody to put any barriers to anybody in the world buying American items.
So we always said, “Don't put tariffs in place. Remove as many tariffs as you possibly can.” But that did change.
Melanie Plenda:
If these tariffs go into effect, what will that mean for the average consumer here in New Hampshire? What will that mean for the state economy?
Marie Duggan:
I'm someone who firmly believes that we can do more manufacturing in the United States. However, tariffs have to be used judiciously.
For example, a 5% tariff would be a significant tariff, and right now, as it stands today, Donald Trump has put a 145% tariff, an additional tariff, on Chinese goods. I think some goods already had tariffs. For example, Joe Biden had put a 100% tariff on Chinese electric cars. So that is now 245%, and, as you said, they change day to day. First of all, they're too drastic, and they're too changeable.
If you're going to suddenly say, “There's a 145% tariff,” then the companies in Keene that have worked for 20 years to develop customer relationships with people are going to see orders for their million-dollar machines suddenly canceled. That could really kill what has been a bright spot. It could cause firms to go belly-up.
So putting dramatic tariffs suddenly does not have the effect of protecting U.S. industry. It has the effect of causing immediate loss of customers. So that really creates instability, and I'm afraid we might see that. I really hope that none of the diamond turning machines or optics companies in Cheshire County fail. I hope they all make it.
There are some benefits to tariffs. We have had this problem of companies going offshore for about 20 years now, of moving manufacturing offshore. So some American companies will begin to consider, for example, buying a machine here in Cheshire County, instead of buying a machine in Germany.
Melanie Plenda:
As you mentioned, President Trump is doing all this in an effort to bring back manufacturing to the United States. What do you think of that idea? What will that look like? How long will that take?
Marie Duggan:
I think I want to make it very clear, I don't think that President Trump is putting tariffs in place primarily to bring back manufacturing. I think that the national debt situation in the United States is critical at the moment, and he has to raise taxes. He has to raise taxes on rich people, unless he can find a way out, and it’s very difficult for any politician of either political party to raise taxes on the top earners in the system where we have a political system financed by donations.
So Trump thought he had found a way out. He could tax imports, and that would be a really different way to raise money that could be used to pay down the national debt. So I think that was the desire to find a way to pay down the national debt without raising income taxes at the high end. It was a really important part of his decision process.
Melanie Plenda:
Let’s move to another related topic — the stock market fluctuations. What role has tariff news played in that?
Marie Duggan:
I think it played a major role. If you just think of Apple where the $1,100 selling price for the iPhone 16 Pro — if the cost is $550 to produce it in China and there's a 54% tariff, well, then Apple's profits are going to fall from like $550 per phone to like $150 per phone. So that is immediately going to make Apple stock price fall. Then, if you remove the tariffs — boom, Apple’s stock price rises.
Every company would like to pass the cost of a tariff on to its consumers. So we are all going to have to pay more too, but companies are going to have to absorb some of the cost too, and that's going to push their profits down. That's why the stock market reacts — if expected future profits are falling, then your stock price will drop like a stone.
Melanie Plenda:
Some people, especially Democrats, have asked for an investigation into stock market manipulation. Why is that? And what does that mean?
Marie Duggan:
When we heard 54% tariffs on China, Apple’s stock did drop quite a bit because everybody knows that Apple's supply chain comes from the production in China and other parts of Asia. Now, if eventually Donald Trump removed the tariff on Apple, so if you or a staffer was at a meeting who heard that Donald Trump was planning to remove the tariff on Apple, you could have run out and purchased Apple stock at a low price, and then once the tariff is removed on Apple, it's going to rise immediately. Depending on how much money you put into that you could make quite a bit in one day.
Melanie Plenda:
Many people are invested in the stock market in a variety of ways — through personal accounts, or something like a 401(k) or IRA. What should people be asking their investment or financial advisers when they see this kind of volatility?
Marie Duggan:
I'm not a financial advisor. I see what businesses do, like Elon Musk with Tesla — they have investments in different countries. Tesla isn't like
Apple. Tesla makes the entire car in China to sell it mainly to Chinese people. It makes the car in Germany to sell to Europeans, and makes the car in the United States to sell to Americans. But what they've done is they kind of insulated themselves from dramatic changes in any one country by being tied to three different parts of the global economy.
So it seems that when we talk about diversification with investments, people are always talking about whether you should have stocks or you should have bonds, and that's probably a good idea. But it also seems to me that right now, diversifying in terms of investments in different parts of the globe, because we don't really know how it's all going to shake out.
Melanie Plenda:
Given this volatile economy, what will the future financial situation look like in the next year, or the next five years? What should consumers or businesses do to navigate this environment?
Marie Duggan:
Well, things are going to freeze up because businesses don't know what's going to come next. They don't really know right now what kind of technology or partnerships around the globe they should invest in. What's going to happen to their old relationships? Are their Chinese customers even going to talk to them now? Is this going to be something where it's kind of like the Cold War, where you have a total break?
Also, people think reducing government spending is going to solve everything. Actually, the businesses in Cheshire County have long relied on producing under government contracts. So that's been kind of a quiet backbone to a lot of industry in this area. I think businesses had planned to make products that would be sold to the government, and now there's a lot of uncertainty as to whether those government contracts will be solid as they were in the past. So there's a lot of uncertainty, and when businesses have uncertainty, they kind of freeze.They don't spend, and that's what could cause us to have a recession.
Melanie Plenda:
Fascinating. Dr, Marie Duggan, Keene State College professor of business management, thank you for joining us and discussing these issues.
“The State We’re In” is a weekly digital public affairs show produced by NH PBS and The Marlin Fitzwater Center for Communication at Franklin Pierce University. It is shared with partners in the Granite State News Collaborative, of which both organizations are members. For more information, visit collaborativenh.org.