No. of Recommendations: 19
1) A tariff is a fee on the supplier, collected by the importing agent.
To the supplier it is just another cost item, along with all their other costs and taxes and fees.
You could look at it that way if you like. It can happen, but it isn't really accurate in most instances.
Imagine a firm that sells widgets for €100 a pop wholesale, globally. Self-sealing stem bolts, say. That's the normal way firms sell stuff.
If there is a 25% tariff on that going into the US, who is paying? Some mix of the importer, the retailer, and the consumer, all of whom are in the US.
Volume discounts are normal and the US is a big importer of a lot of stuff, so the US gets good prices. But there aren't that many companies that sell to the US at a lower price than elsewhere just because the US is, well, so wonderful. That's simply because the vast majority of companies don't have nearly enough margin to sell at the discount that some folks in Washington seem to expect. Blood, stones. As you note, the price is set by supply and demand, but there is zero supply at a price that's a loss to the supplier, so you can rule that out. (if you ever want to empty the shelves, legislate retail prices downwards)
Producers might cut prices to "eat" some of the tariffs, as you would for any big customer, but only modestly long term. Maybe a bit more short term to smooth price changes out over time protecting market share and production/channel capacity, and to implement a wait-and-see approach to see what the actual regulatory environment will settle down to over time. At the moment, the actual early figures are that new tariffs are on average being split 20/40/40 producer, US distribution+retail, and US consumer. So 80% is borne within the US so far. That would likely rise a bit higher if the tariff levels stay/end up at the high end of the range of people's expectations, as the "smooth things out" and "wait and see" strategies get exhausted.
There is one way to get to the old saw "don't tax you, don't tax me, tax that fellow behind the tree": currency movement. If the US dollar rises, that increases the true salary and purchasing power of US consumers. They still buy tariffed imported goods at the same local nominal price, and the producer still sells at his local wholesale price. This happy outcome is unfortunately offset by the expectation that trade and therefore incomes will fall somewhat, the normal expectation when trade intensity falls. It also tends to increase the trade deficit as a rising currency strongly favours imports over exports, probably not the intended effect. If the currency falls more, the reverse is likely to happen: the tariff hit to sticker prices will be a double whammy for locals spiking the cost of living, but imports will fall a lot (the intended outcome).
It's certainly true that things work a certain way on average, but not always in every instance. Too much certainty isn't a good thing.
Personally, I think the highest probability important outcome that isn't widely appreciated is the likely fall in US exports over the next year or two, relative to what would expect at that point in the business cycle. For once there is a pressure in the same direction among classical trade theory (Lerner equivalence outcome of tariffs), the attitudes and actions of trade partners (the Jack Daniel's effect), and global portfolio allocation changes.
Jim
