The self proclaimed master of the art of the deal continues to spread around nonsense about his tariff proposals. Let’s stay with the simple one…basically a 10% levy on all imported goods. Trump continues to poo poo the economists who say that this will be a tax on American consumers by saying it will be charged to foreign countries. There are any number of discrepancies in his thinking or at least his rhetoric.
First, a tariff is a tax by definition. And yes it is imposed on imports in this case and not an individual. But a foreign country isn’t going to be paying it. It will be levied at the border as imported merchandise arrives in the US and will be paid by the importer…thereby increasing their cost of doing business. And every businessman and economist knows that increased costs eventually get passed along to the consumer through higher prices at retail. And what is the result of increased retail prices? Well, INFLATION!
Example? Let’s say I sell knit mittens during the depths of our wonderful Wisconsin winters. And I contract with a factory in Indonesia to manufacture my mittens. And the cost of raw materials, dyes, labor, shipping, etc brings the wholesale value of my mittens to $10 when they arrive in port. So if a new Donold Trump regime levies a 10% tariff on my mittens, then I pay the federal government $1 and my cost of goods sold is now up to $11. And it is probably higher than that because there will be some administrative costs as well to pay and account for the tariffs, but we want to keep this simple.
So I have three choices. I can absorb the added costs but 10% is pretty significant and I probably can’t afford to. I can use cheaper materials or find a cheaper vendor or cut other costs (which may result in a n inferior product and reduced sales). Or I can pass the tariff along to my customers which is the most likely resolution (although that too may result in reduced sales).
If I pass along the tariff, I will still want to protect my margins…so let’s do this in whole dollars to keep it simple. My mittens were $10 to manufacture and import but with the added tariff now cost $11. I used to wholesale them at $15 a pair with a suggested retail of $20. If I try to maintain my dollar margins I would now have to raise those numbers to $16 wholesale and $21 retail. And although I have maintained my margin by hard dollars I have actually reduced my margins as a percentage of cost/retail…and although my quarterly gross sales may go up (if I don’t lose business at this higher price point)…my net sales by percentage may actually go down…and my shareholders may respond by selling off stock with a resulting reduction in share price. Not where I want to be but what a tariff may actually cause to happen.
So if mister stable genius doesn’t understand how tariffs actually work, he has no business being President of the United States.
And if he does know how tariffs work, he is lying to us on a near daily basis, and he has no business being President of the United States.
Tariffs are going to cost consumers money and tariffs can be a driving force for more INFLATION!
