Tariffs Explained by the Shirt Off Your Back

Who Pays for Tariffs Explained by the Shirt Off Your Back.

 

Whether you are a fan of tariffs or not, it could be useful to discuss how they influence the price you pay for some simple item, like for instance, an inexpensive polo shirt. First, we need to know something about calculating retail prices. If you don’t give a damn about calculating retail prices, skip the next four paragraphs*.

*Retailers usually determine the retail price of something they sell in terms of the markup, which is the amount added to their cost for the item. That markup is usually expressed as a percentage, and a common markup for items such as polo shirts is 40%. However, the base for that percentage markup should NOT be the cost of the item. Rather, it is almost always the selling price. Here’s why:

*Suppose a seller’s cost for a package of underwear is $6.00 and he bases his 40% markup on his $6.00 cost. Calculating 40% of $6.00 produces 40% X $6.00 = $2.40. Add the $2.40 to $6.00: $2.40 + $6.00 = $8.40. Perhaps $8.40 seems like a reasonable price, but it misleads the seller into thinking his margin is 40% of the selling price. That can be disastrous because 40% of the selling price $8.40 is $3.36, not the $2.40 he added to his cost.

*For example, suppose that business is slow, and a month later, the seller decides to markdown his stock by 30% because he believes that 40% - 30% = 10% will still allow him a 10% margin to cover his expenses. Notice that 30% of $8.40 is $2.52. If he discounts the price 30%, then he will sell the underwear for $8.40 - $2.52 = $5.88 for an item for which he paid $6.00. Not only is not making the 10% markup that might cover his overhead, he loses $0.12 on every sale.

*The seller should have set the selling price at $10.00. Notice that 40% of $10.00 is $4.00 which is his markup, and 60% of $10.00 is $6.00 which was his cost. This greatly simplifies matters. Now, if he discounts the underwear at 30% off, then 30% of $10.00 is a $3.00 reduction in price to $7.00. The markup from $6.00 cost to $7.00 sell is $1.00, which is still a 10% markup on the original retail price of $10.00.

In conclusion, markups* are nearly always based on the selling price, not the cost price. Now, back to tariffs.

Let’s be clear about tariffs. Tariffs are added to the cost of an item using the cost as the base AFTER it arrives in this country, and that tax is collected in this country, not the country of origin. Perhaps the tariff will influence the foreign manufacturer to lower their price to compete, but if all their competition is subject to the same tariff, why would they?

The following tables show the effect on retail prices that customers in this country would pay if the supply chain simply passes the charges along for imported polo shirts, and why wouldn’t they? It raises their margins, and all their competitors pay the same tariff and so it doesn’t encourage much competition based on the cost of imports.

 

NO TARIFF        Price

Polo shirt	$        4.00	/item	Arriving
After Tariff	$        4.00	0%	Tariff
Import/Dist	$        6.67	40%	*Markup
Retailer	$      11.11	40%	*Markup

 

10% TARIFF          Price

Polo shirt	$                4.00	/item	Arriving
After Tariff	$                4.40	10%	Tariff
Import/Dist	$                7.33	40%	*Markup
Retailer	$             12.22	40%	*Markup

 

20% TARIFF          Price

Polo shirt	$                4.00	/item	Arriving
After Tariff	$                4.80	20%	Tariff
Import/Dist	$                8.00	40%	*Markup
Retailer	$             13.33	40%	*Markup

 

Notice that a 20% tariff increases the retail price by $2.22, and only $0.80 of that goes to the government. The remaining $1.42 goes to the distributer and retailer. It is possible that the distributer and retailer, will reduce their margin and absorb that price increase, but this is likely to make stockholders unhappy and cost executives their bonuses. Past business practices suggest all of the tariff costs and much of the businesses new margins will happily be passed along to consumers. In any event, the tariff itself is paid by people in this country, whether they are the consumers or the businesses who provide the goods. They are NOT taxes paid by foreign businesses or countries. Foreign businesses or countries may attempt bribes for our influences and politicians, but they do NOT pay import taxes to the U.S. Treasury.

Are across the board tariffs inflationary? I’m no economists, and I suspect economists don’t all agree (they seldom do), but I expect prices to go up, and that is a hidden tax not easily measured that you cannot deduct on your 1040 form. Many economists suggest that tariffs will hit low- and middle-income folks the hardest.

Perhaps you still like the idea of tariffs, and that’s fine so long as you understand how they work.

#TRUMP, #TARIFF, #WHO PAYS?