Brexit was similar. What amazed me about Brexit was how nobody that voted for it cheered when it came in.
Next, I was amazed at a lack of coordinated opposition. Nobody joined the barricades, there was no unrest, no opposition party garnered votes.
Biggest take away was that life went on. There was no shortage of goods on the shelves and nobody cared that the pound lost 25 percent or so.
From Brexit, I anticipate much the same in America, for the economy to linger on due to generational wealth, with people just getting on with it.
The pricing due to tariff taxes will also be easier to absorb than what people think.
Imagine a finished good such as a bicycle, imported from China. Retail margins are not great for the retailer because they expect sales from accessories.
If the bicycle costs USD 1000 at retail, what does it cost to the importer?
The retailer buys the bike from a wholesaler for USD 500 and the wholesaler buys the bike from the distributor for USD 250. The distributor buys it from the importer for USD 125.
Margins will be negotiated with volume and delivery schedules, but the bicycle, at import is only valued at 125, not 1000 in this simplified example.
Lets assume the tariff works out so the importer has to pay 300 rather than 125 to get the bike out the port. Let's assume a 175 tariff fee. This can be passed down the chain much like how duty is charged on tobacco that gets imported.
Hence the customer is paying 1175 for the 1000 bike, not 2450.
The customer can buy a lower specification model of they don't like the price hike, or the retailer can shave their margins to gain market share, shift inventory and gain a customer. In time the price can creep up.
If the tariffs were collected at Walmart rather than at the port then this means of handling the tariffs would not be possible.
For a cycle manufacturer that owns the factory in China as well as the distribution chain to the customer, they could set up a shell company that imports the bicycle for a dollar, to then sell that bike to the retailer they own for proper money. The customer then pays the same 1000 with the 1.45 absorbed.
The company could also own a design office in the Chinese factory and sell their design consultancy services back to the US sales operation for millions, millions that won't be taxed as a tariff since it is a service, not goods.
In this way the USD profits are repatriated with the factory. The factory sells it's goods almost for free. Next there is the problem of what to do with those dollars since the factory workers are paid in Yuan. Those dollars need to be sold or used to buy oil, rubber and other raw materials.
This type of Hollywood accounting is standard for multinationals but beyond the reach of small businesses.
Apple do this type of magic accounting, most famously in Ireland. Amazon use Luxembourg. So why the exemption for iPhones? Well, if Apple have to pay USD 2 in tariff taxes on a 1000 iPhone then that is a big deal to them. They were never going to have to charge 2450 for that same iPhone.
Ideally a multinational makes a loss in the country of manufacture and a loss in the country of sale. This means minimum wages and no taxes paid. They then make billions in their chosen base for the shell company in the middle and use a tax haven to get the dollars out, which they then use to buy their own shares, thereby not paying dividends.
> Hence the customer is paying 1175 for the 1000 bike, not 2450.
No, all of these business rely on percentage margins to stay cashflow positive, not absolute revenue. It's possible that a few companies will absorb a small amount of the percentage, and result in it costing 2200 or something, but the tariff is not like VAT, it won't get "tacked on at the end", because each step in the chain depends on economies of scale that in turn depend on demand that are sensitive to price. Price going up decreases sales, which incurs additional overhead per sale, etc. Businesses are not going to give up their net margin for free, they'll only do it if it's the least bad way to address the shortfall of sales as a result of price increases.
You are correct in that it is all based on margins. I am used to the UK where there is VAT, plus multiple steps in an import chain, from importer, distributor, wholesaler and retailer. With some brands the importer is the distributor, sometimes the distributor is the wholesaler and sometimes the wholesaler is the retailer. Supply chains depend on the product to some extent and if the product is exclusive to a given supplier.
In B2B there is typically a doubling of price at each step so the 'trade price' appears incredibly cheap to a customer, yet that is a multiple of the import price.
Each step has its own risks and overheads so it is not greedy to have these markups.
B2B customers are in a strong position to negotiate prices and B2B sales staff know their customers well. It is therefore entirely possible for costs due to tariffs to be passed down the chain without everyone doubling that tariff tax at every stage. There is no incentive to do so, or for those costs to be absorbed.
What I am saying is that it works more like a customs duty rather than a simple price hike.
Wait for the panic to die down and see how this happens.
Two observations, much like Brexit, life goes on, shops are full and people still eat. Then, as for the vast bounty that the guy in the White House expects to raise, there is very little and no cash windfall arrives.
Clearly some products are more complex than others, I only really know typical e-commerce stuff, not automobiles that go across the Mexican border three times as they get assembled.
I have noted that the media has mom and pop entrepreneurs importing things such as plastic spoons for autistic pigeons to clean their ears with or diapers for left handed crypto-bros, where they are going to be exposed to the tariffs bigly. The media have not had typical medium sized retail businesses that buy goods from wholesalers that deal with distribution companies.
I am no fan of the tariffs or the orange man but I did live through Brexit and have my reasons not to go into panic mode.
I also think historical comparisons to tariffs a century or more ago are not helpful as the distribution chain has evolved over time. In these distant times a tariff would act like a customs duty on tobacco or alcohol.
Doesn't this analysis kind of break down if all of a sudden the domestically produced products shoot up in price because all of the components and raw materials are now subject to large tariffs? Suddenly there is a lot more room for profit if the prices of your competition goes up.
Yes, for domestic manufacturers. To go with the bicycle example, you could assemble bicycles in the USA for a specific niche, maybe cargo bikes or tricycles for the mobility impaired. The frame, wheels, tyres, brakes, gears, seats and other parts would be imported with tariffs paid. There would be several suppliers and limited options for Hollywood accounting.
Most of the costs would be in assembly, marketing, retail, shipping and sorting forth, so there would be just the imported parts to get the tariff tax, but you could just pass those costs on, for the customer to choose a lower specification model of they can't afford the product.
Some easier components could be sourced from the USA, for example, the handlebars are just a bent tube, so why get a Chinese person to make it? However, the aluminium for that tube will be taxed with a tariff so it is unlikely that a guy down the road will step up to make these things.
As mentioned, it will be like Brexit, the worst fears won't materialise, people will still be eating food and everyone will just become a lot poorer with a stagnant economy.
With Brexit the little guy stopped selling to Europe but the multinational didn't skip a beat.
There were no public celebrations, it was not as if the Berlin Wall had just fallen. The only bubble I was in at the time was the UK, the rest of the world really didn't care.
Next, I was amazed at a lack of coordinated opposition. Nobody joined the barricades, there was no unrest, no opposition party garnered votes.
Biggest take away was that life went on. There was no shortage of goods on the shelves and nobody cared that the pound lost 25 percent or so.
From Brexit, I anticipate much the same in America, for the economy to linger on due to generational wealth, with people just getting on with it.
The pricing due to tariff taxes will also be easier to absorb than what people think.
Imagine a finished good such as a bicycle, imported from China. Retail margins are not great for the retailer because they expect sales from accessories.
If the bicycle costs USD 1000 at retail, what does it cost to the importer?
The retailer buys the bike from a wholesaler for USD 500 and the wholesaler buys the bike from the distributor for USD 250. The distributor buys it from the importer for USD 125.
Margins will be negotiated with volume and delivery schedules, but the bicycle, at import is only valued at 125, not 1000 in this simplified example.
Lets assume the tariff works out so the importer has to pay 300 rather than 125 to get the bike out the port. Let's assume a 175 tariff fee. This can be passed down the chain much like how duty is charged on tobacco that gets imported.
Hence the customer is paying 1175 for the 1000 bike, not 2450.
The customer can buy a lower specification model of they don't like the price hike, or the retailer can shave their margins to gain market share, shift inventory and gain a customer. In time the price can creep up.
If the tariffs were collected at Walmart rather than at the port then this means of handling the tariffs would not be possible.
For a cycle manufacturer that owns the factory in China as well as the distribution chain to the customer, they could set up a shell company that imports the bicycle for a dollar, to then sell that bike to the retailer they own for proper money. The customer then pays the same 1000 with the 1.45 absorbed.
The company could also own a design office in the Chinese factory and sell their design consultancy services back to the US sales operation for millions, millions that won't be taxed as a tariff since it is a service, not goods.
In this way the USD profits are repatriated with the factory. The factory sells it's goods almost for free. Next there is the problem of what to do with those dollars since the factory workers are paid in Yuan. Those dollars need to be sold or used to buy oil, rubber and other raw materials.
This type of Hollywood accounting is standard for multinationals but beyond the reach of small businesses.
Apple do this type of magic accounting, most famously in Ireland. Amazon use Luxembourg. So why the exemption for iPhones? Well, if Apple have to pay USD 2 in tariff taxes on a 1000 iPhone then that is a big deal to them. They were never going to have to charge 2450 for that same iPhone.
Ideally a multinational makes a loss in the country of manufacture and a loss in the country of sale. This means minimum wages and no taxes paid. They then make billions in their chosen base for the shell company in the middle and use a tax haven to get the dollars out, which they then use to buy their own shares, thereby not paying dividends.