How tariffs work. Explained quite well. Lot of information on the 2018 tarifffs and how Wall Street responded.
Now weāll look at what tariffs did and didnāt do last time. One, they didnāt trigger inflation, which stayed below the Fedās target. Two, they more than doubled tax receipts from customs duties. And three, they hit stocks, and the S&P 500 tanked 20% in 2018.
Some basics about tariffs.
I
posted this list before. But itās important, so here it is again:
- Tariffs have two roles: raising taxes (which the US desperately needs); and changing the economic math for domestic production.
- US ātrading partnersā have used tariffs extensively to raise taxes and to protect and support their own industries at the expense of US production and exports. The US has used tariffs, they all have used tariffs to raise taxes essentially since the beginning.
- Tariffs are applied to the cost for the importer. If a big US retailer buys T-shirts by container loads from a factory in Bangladesh that it intends to retail in the US for $9.99 each, and if the tariff on this product is 25%, the importer (the retailer) is going to have to pay 25% in taxes on the cost from the factory. If the factory charges $1 per T-shirt, the tariff amounts to 25 cents.
- Tariffs are a direct tax on the profit margins of foreign producers and US importers. Whether or not they can charge more for their products without gutting their sales to pass on the tariffs is decided by the market. And if they can pass on a portion or all of the tariffs, it would be a one-time bump.
- Companies are already charging the maximum amount they can and still obtain their sales goals. If they raise prices to pass on the tariffs, sales may fall. Whether or not the retailer can raise the price of the T-shirt to $10.24 without pulling the rug out from under the desired sales volume is decided by the market, not by the retailer, and the retailer may find that it has to eat the tariffs.
- US importers may negotiate the purchase price to where the foreign factory eats part of the tariff, in which case foreign producers pay the taxes to the US government.
- Domestic production reduces transportation expenses, loss of Intellectual Property (a huge issue in China), supply-chain uncertainty and lead times (catastrophic issues during the pandemic), and other costs and risks. Tariffs tilt the balance further in favor of domestic production.
- Foreign manufacturers can avoid tariffs by producing in the US. All major foreign automakers that sell in the US already manufacture vehicles in the US. In terms of āUS content,ā Honda models are right behind Tesla on top of that list. Tariffs will further encourage US production, including of components and assemblies.
- Many producers have cut prices in the US over the past two years, either directly or through incentives to reach their sales goals, including automakers (here) and homebuilders (here). In this environment, they will eat 100% of any tariffs because they cannot pass on any additional costs.
- Industrial robots cost about the same anywhere. Products can be and are manufactured in the US price-competitively when advanced automation reduces the labor-cost component. Tariffs add some pluses to that math.
