Recently I have had a few folks ask me about tariffs, since
tariffs have been in the news a lot lately and they know that I have dealt with
and complained about them in the past (as has almost anyone whose career has
direct involvement with consumer goods in the US). Since I’ve been asked a few times and know
just enough to be dangerous I thought I’d do a blawg post on it, esp since it’s
a good challenge to make something as bone dry as tariffs as entertaining as a
tale of a fun adventure! And, unlike a lot
of things that happen at the federal level, this ridiculous trade war that the
Trump administration is inexplicably waging will actually affect literally –
not virtually – everyone.
A “tariff” is a tax that companies pay to their own
government to import (or export) goods into their home country. Since I’ve been in the shoe biz and know that
well, I’ll use that as an example.
Say Allbirds (a pretty cool new shoe company that came out
of nowhere over the last coupla years and is killing it, and was just featured
in a fun podcast on How
I Built This) has a new shoe. As I
mentioned in the earlier post about river footwear, there is a “Harmonized
Tariff Code” and literally each product brought into the United States must
have an associated tariff code assigned to it.
If Allbirds is a smart company – and they likely are, though I bet it
was a bit of a learning curve – they likely use their industry experts that they
hopefully hired to figure out what the code will be, because that will
determine the percentage price of the cost of the product that you pay. It’s significant because the tariff
percentages vary from zero to fifty percent and beyond, and if you guess wrong
and the humorless US Customs agent who inspects your shipment declares a code
for your product that is different than what you expected, all your profit
margin could evaporate before it even hits your warehouse. In Allbirds’ case, they are using wool as
their upper material, and since that’s unprecedented for an “athletic” shoe
(important in the Codes) that undoubtedly made a difference.
So hopefully the shipment of Allbirds has come into the Long
Beach port from their factory partner in China, the humorless customs officer
inspects them and declares a code, and Allbirds gets a bill from the US gubment
for thousands of dollars.
For easy math, lets say that the shoes are $100 (they are
$95), typical dealer markups is 45-50% (easy math=50%) so the dealer buys them
for $50, and Allbirds wants to get an industry-standard margin so they are
buying” the shoes made from their specs from
the Chinese factory for $25. A 10%
duty (the terms tariff and duty are more or less interchangeable) means that Allbirds
is paying $2.50 for each pair, and for a 10,000 pair order (that’s pretty
small) they’ll owe Uncle Sam $25,000. A
fair chunko’ change for a company that is still just getting going.
So Allbirds sets its suggested retail prices based on what
the factory will charge to make the shoe, the cost of the box, the shipping
from China to the port to their warehouse to the dealer (or consumer), and….the
duty they have to pay on the shoes. When
any of those costs go up, then something has to give: Allbirds’ margin, the price that they sell to
their dealers, and/or the price to the consumers. And historically the duty codes have been
generally carved in stone (the US customs has been too lazy to change them
since the beginning of time) so that historically is something that even a new
shoe company can count on.
But in order to save the economy from….the 10 year expansion
that it’s had, with low inflation and tons of job growth? President Trump declares that “Trade
Wars are good and easy to win” and
announces he’s going to jack the duty rates for all sorts of products coming
from our two biggest trade partners (consumer goods from China and fruits and
plenty of other products from Mexico) In doing so he proves former Fed chair
Janet Yellen right in her assertion that Trump
does not have a basic grasp of macroeconomics. In Allbirds’ case, what that means is that
their $25 shoe that they paid $2.50 for to the US government now has that much more cost associated with
it. So does Allbirds feel like they
should be shouldering this philosophical tete ‘a tete between countries “at
war?” No, they understandably say “We
gotta raise our prices to account for the increase in our costs.” And in the above easy math, any tariff
increase is multiplied fourfold by the time it reaches the consumer. And here’s the kicker: China doesn’t care! The factory still just makes the shoes and
sells them to Allbirds for $25.
In Trumpworld, the idea is that the athletic shoe industry –
and clothes, and sleeping bags, and tents, and Ikea shelving unit industries –
will leap up and say “Yes Sir Mr. President!
We will forsake the 40 years of relationship building with our factory
partners to help them build the infrastructure needed to produce shoes that our
fellow ‘Mericans can buy for $100 and start anew! We’ll build shoe factories in the US from
scratch using super-expensive machines and molds that are only available in
China and pay people $30/hour to make the shoes, and then magically still sell
the shoes for $100!” Suffice to say,
that ain’t happenin’.
There are some domestic shoe (boot) manufacturers: the Berry Amendment
passed by Congress in 1941 mandated that the US military has to use
US-manufactured products, and there are companies that are nearly-exclusive DoD
contractors for boots. Danner is one
such company, and in addition to making $150 light hikers made in China they
also “construct” $200 boots using Asian-made fabrics that they import. And they also have their premium line of
hiking boots that are 100% domestically produced…for >$380. So yes, it can be done (though none of those
boots use EVA, which is the light, typically-white midsole material that gives
shoes their cushioning, because there are no EVA manufacturers/molders in the
US) but if you are supportive of Trump’s Trade War you should also be
supportive of $300 shoes.
The Mexico tariff thing is even more baffling to me, tho to
be fair that seems to be de-escalating.
I get it that the immigration thing is arguably the most complex and
challenging problem we face, but Mexico just happens to be the country between
the likes of Guatemala and El Salvador where the folks are fleeing from, and I
am amazed (or maybe I shouldn’t be) that there has been zero talk along the
lines of “how can we help/influence Guatemala and El Salvador to make them
less-awful so people won’t feel compelled to flee to the US?”
A lot of the stuff that the Trump administration is
doing/has done really doesn’t affect most of us: the escalation in tension with Iran, the Russia
investigation, even the immigration stuff.
But this trade war? It literally has the potential to crush the zillions
of American companies who rely on international manufacturing partners
(including our beloved car companies, who rely hugely on Chinese-made machines
to help make their cars) and – most importantly – the domestic companies that
we rely on for reasonably-priced goods will be forced to jack their prices to
their dealers and to consumers, and we will all suffer from Trump’s misguided “war.”
Ps – Paul Krugman is far smarter than most everybody (Nobel
Prizes typically denote this) and he has his own summary of How goes the wars….
https://www.nytimes.com/2019/03/03/opinion/how-goes-the-trade-war.html
