Why Trump's Tariffs Won't Cost Consumers a Nickel
Past administrations have called out China for violating the internationally agreed-upon rules of trade for decades.
After countless high-level talks, admonitions and appeals, China did nothing to change its cheating ways.
President Trump has dispensed with the talk and taken action, slapping tariffs on billions of dollars of goods China exports to the United States at artificially low prices.
Naysayers predicted the president’s tariffs would tank the stock market and drag down the economy. But the Dow is posting record gains, unemployment is at a 49-year low and the economy remains strong.
The forecasters are at a loss to explain why reality isn’t conforming to what they learned in school. A Wall Street economist tells Reuters, “It’s like we have nothing to fear, but we should.”
Critics also contend that President Trump’s tariffs will inevitably lead to higher prices for consumers. We’ve heard this before. They said aluminum tariffs would spike the cost of a six-pack. But soda and beer prices have remained flat.
Now Walmart has joined the chorus. But we have no more reason to believe officials there than other boys who cried wolf. To understand why, let’s review how tariffs work, and how specifically the president’s tariffs work.
First, the basics:
Tariffs aren’t imposed on the final retail price the way a sales tax is. They are also not imposed on the wholesale price. They are not even imposed on what the importer pays at the dock when the goods enter the U.S. The duties are imposed on an even lower price than that – and that’s a scandal in itself.
Let’s say Black & Decker wants to sell a line of toaster ovens with a $60 retail price in the U.S. It goes to a Hong Kong middleman who deals with Chinese manufacturers. The Hong King middleman pays his cousin at a Chinese toaster oven factory $10 for toaster ovens. Black & Decker agrees to pay the Hong Kong middleman $20 for the toaster ovens, and picks them up off the boat in Long Beach, Calif.
Let’s say there’s a 10 percent tariff on toaster ovens from China. (There isn’t.) The tariff would only be $1 because it’s calculated on what the Hong Kong middleman (says he) paid his cousin at the toaster factory – the first sale -- not what Black & Decker pays to take delivery at the port – what’s known in the jargon of the trade world as the last sale.
As a result of this accounting flim-flam, Hong Kong middlemen and the importers who love them are getting rich while taxpayers are getting hosed for untold billions of dollars the U.S. Treasury is not collecting.
When the U.S. moved to assess duties on the last-sale price, the import lobby screamed bloody murder and Congress killed the proposal. For the record, every other country calculates tariffs on the last-sale price.
Now, as to why tariffs won’t necessarily mean higher prices for consumers:
The Trump tariffs are designed to inflict maximum damage on China while sparing American businesses and consumers. For the most part, they don’t target consumer goods. Rather, they are aimed at component parts American companies use to assemble finished products.
So, if a particular component constitutes one-tenth of the cost of the finished product, a 10-percent tariff on that component amounts to, at most, 1 percent (10 percent of one-tenth) of the product’s wholesale cost – and probably far less, because of the first-sale rule (see above). And since wholesale is roughly half of retail, we’re looking at cost difference of one-half of one percent (0.5 percent).
The wholesaler, retailer, importer or foreign manufacturer may well choose to offset the tiny cost increase rather than pass it on.
And here’s the beauty part, how the tariffs are designed to hurt China: The Trump tariffs target items available from sources outside China. Buy from a supplier outside China, avoid the tariff.
President Trump’s surgical strike tariffs are sending companies a clear message: Do business anywhere but China.
And the message is getting through. Companies no longer see China as a safe space. China needs a continued influx of foreign investment to feed its economic growth, and the president’s trade policy encourages companies to look elsewhere.
President Trump’s trade reform, tax reform and regulatory reform work in combination to make America the best place on earth to live, work and do business.
His comprehensive strategy is lowering costs and raising wages for Americans.
It’s working as designed -- to put America First.