negotiations

Tariffs For Dummies

Trump keeps saying that “China pays the tariffs” and that “tariffs are great for the US.” These are quite ridiculous claims, so let’s explain tariffs even a 10-year-old can understand. We will use three business parties and the government in the pictures below: a Chinese factory that sells products, a US corp that imports Chinese goods, American consumer, and finally the US gov.

Scenario 1: No Tariffs

Let’s say that a Chinese factory sells a product for $100. The US corp pays $100 and sells it for $120, thereby making $20 profit. This is simple:

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Scenario 2: 25% Tariffs Introduced

Now, Trump introduces 25% tariff. This will be paid by the importer. This works just like a sales tax.

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But, the US importer will very likely start negotiating with the Chinese factory. The US corp will say, “Hey, I really cannot afford to pay $125. And I can’t pass it on to the consumer. You have to help me out.”

So, the Chinese factory will reduce the price. (Often times, they might say, “Ok, buy twice as many goods, I will give you a discount.”)

Scenario 3: China Offers a Discount, US Corp Takes a Hit, US Consumer pays more

So, let’s say that China brings down the price from $100 to $92. But the US corp still has to pay 25% tariff on $92 (25% of $92 = $23).

So, now the US corp pays $92 + $23 = $115. But it needs some profit, so it raises the end-user price to $130

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Conclusion

So everyone loses, except the US government. China loses $8 in revenue, US corp loses $5 in profit, and US consumer loses $10.

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Note that China does NOT send any money to the US gov. China merely gives a discount. Its not the same as “China pays the tariffs,” as Trump keeps claiming:

In terms of percentage (in this example): China’s revenue goes down by 8%, US corp’s profit goes down 25% and the consumer/retail price goes up by about 8%.

Think about large corporations such as Walmart, Target, Macy’s etc. If their profits go down, their stock prices are going to get hit. And lower profits will also result in layoffs.

This is why 50,000 US corporations have applied for exemptions from tariffs; Walmart’s CFO has warned that new tariffs will certainly result in higher prices at the stores; and experts are warning that if Trump imposes 25% on all Chinese goods, then the average American family of four will see their expenses go up by $2,300 per year.

Tariff Man is going to crash the stock market and increase unemployment — ruining his two favorite metrics for his performance.