Plain English with Derek Thompson

A Toy Manufacturer Explains How Trump’s Tariffs Could Crush His Industry

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Derek Thompson

About the episode

In the past three weeks, we’ve spoken to economists about the tariffs. We’ve spoken to a historian about the Smoot-Hawley Tariff Act and the 100-year legacy of American protectionism. We’ve spoken to supply chain expert Jason Miller from Michigan State about why China is set up to win the upcoming trade war. But the voice we haven’t heard is the voice of business. People who run companies are screaming at whoever will listen that the White House agenda will decimate business and plunge their industries into a recession.

Today’s guest is Molson Hart. He’s run a manufacturing business in the U.S. for the past 15 years. His company, Viahart, manufactures consumer products in China, Indonesia, and Vietnam and sells them both in stores and online—mostly in the U.S. His biggest vertical is toys, including Brain Flakes, which are molded plastic disks that kids and adults can snap together to build things.

This is not a bleeding-heart lefty. Quite the opposite: This is a guy who is rooting for the Trump agenda to succeed. This is a guy who told me in our interview that he wants to believe that the Trump team has its heart in the right place when it comes to bringing back manufacturing in the long run. Yet he has called these tariffs not just a bad idea … but the worst economic policy in American history.

I spoke to him this week, and he was just incredibly compelling and thoughtful about the toy industry, why it’s so difficult to bring back American manufacturing quickly, and how these tariffs could do incredible damage to America’s small businesses. So we’ve decided to rush out this interview a little sooner than we intended, in part because it’s great and in part because this news story is moving so quickly, it’s hard to know what reality will even look like next week.

If you have questions, observations, or ideas for future episodes, email us at PlainEnglish@Spotify.com.

Summary

  • In the following excerpt, Derek talks to Molson Hart about the implications of the tariffs for toy manufacturing.

    Derek Thompson: So you’re the CEO of a manufacturing business. Your company makes consumer products like educational children’s toys in China, Vietnam, Indonesia. What do these tariffs mean for your business?

    Molson Hart: For the last four or five nights, every night, I’ve been meeting with a different one of our suppliers. Sometimes that supplier has been in China, sometimes that supplier has been in Vietnam and Indonesia.

    And as a practical matter, we’ve mostly been trying to figure out how we can route manufacturing out of China through another country to reduce the tariffs from 145 percent, which is the current China tariff as of today—tomorrow it may change, we don’t know—to 10 percent in Indonesia and Vietnam so that we can basically save money when it comes to bringing our products to the United States.

    Thompson: Earlier today, I spoke with a supply chain management professor, Jason Miller, and we were going through his analysis of the products that America most relies on China for imports. And they include things like children’s coloring books, 93 percent of which we import from China; 96 percent of toys for pets; 74 percent of toy parts for ages 3 or under.

    The U.S. just obviously, overwhelmingly relies on China for toy manufacturing. And of course, now I’m talking to somebody who works in toy manufacturing, who has a supply chain that runs through China. What do you see as the effect of an escalating trade war with China on your industry, the toy industry?

    Hart: First of all, super hard to make predictions, because tomorrow there could be sufficient outcry about the increasing costs of getting toys for families and children and stuff like that, and you could see that 145 percent tariff out of China become, I don’t know, 20 percent or something like that. So it’s really hard to say.

    China is really good at making certain types of toys. We buy our toys also, which we design and which we inspect in all the countries in which we manufacture, by the way, on every single shipment. We buy them from China; we also buy them from Vietnam and Indonesia. And certain products, certain toy products can certainly be made in Vietnam and Indonesia.

    Right now, amongst the people I know who are selling toys, people are kind of falling maybe into three buckets. The first bucket is “I’m going to cheat to win.” The second bucket is “I’m going to figure out a way to shift my manufacturing over to Southeast Asia as fast as I can.” And we fall in that bucket.

    And the third bucket is “This policy doesn’t make any sense and it’s going to change tomorrow, so I’m just going to wait and see.” And so depending on what the enforcement of these policies looks like, the first bucket could get in trouble. Depending on whether or not the tariffs are reversed, the second and third buckets of toy companies may either find success or be in trouble.

    It’s really hard to say. So in general, people are predicting tariffs to cause inflation, which basically, in the context of toys, means that the prices of toys will rise. But they can actually just as easily cause deflation, because these companies, they budgeted $300,000 or $500,000 to buy their inventory.

    That $500,000 now has a 145 percent tariff on it. And so that is, I don’t know, 1.5 that, so it’s like $1.3 million now worth of goods. They have to come up with the extra $800,000 in inventory costs in order to get their products to the United States. If they don’t come up with that money, maybe supply goes down for toys and prices do, in fact, rise.

    Maybe what happens is that they decide to go bankrupt or they close up shop. And when they go bankrupt, then they close up shop, they want to take their inventory and they want to convert it to cash as fast as possible. And the best way to do that is to lower prices.

    And in that way, you could actually have a deflationary episode, prices coming down when everyone’s expecting inflation. So it’s kind of hard to know what’s going to happen, but it’s definitely dark days for the industry no matter what does.

    This excerpt has been edited and condensed.

    Host: Derek Thompson
    Guest: Molson Hart
    Producer: Devon Baroldi