Including farmers from the last round back in 2019.
CEO of a bank (was it Brian Moinehan?) was on PBS News tonight. He said there is a good chance companies will decide to eat tariffs especially if they benefit other ways. Strong sales and a growing economy can grow their numbers in spite of tariffs. And he mentioned “other factors.” Would that include tax cuts?
Those would have to be some “other ways!” Most business have a net margin between 5-10%. How you eat a 25% bump in your materials costs or finished product costs and don’t go bankrupt I’d like to see.
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OK, but what is the raw materials cost in most manufacturing businesses? Labor, overhead, financing costs are often much of the cost. That 25% bump could be as little as 2.5% of bottom line cost. Then strong sales and growth of the economy can be a wash.
No-one is going to want to get on TFG’s bad side, by pushing back on his world view. Especially anyone in an industry that is heavily regulated by the government, thus subject to “retribution”.
Steve
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It will be interesting to see how this all comes out. We seem to have a full range of opinion on tariffs from total disaster to no big deal.
Time will tell. We should review outcome this time next year.
Let’s say 60% of your materials are imported. Let’s also say 30% of your revenue is spent on materials costs. 0.6x0.3=0.18, or 18% of your revenue may be subjected to tariffs. If there’s a 25% tariff on imports, that works out to 0.18x0.25=0.045 or 4.5% of revenue seen as a cost increase due to the tariff. While not “free”, it’s also not instantly fatal. Of course, if your business is importing final finished goods, it’s likely a bigger deal…
And that assumes you can’t negotiate with your supplier for a lower gross price, find a domestic supplier whose total cost to you isn’t lower than the import cost + tariff, or re-formulate your products to use less of the imported materials. Chances are, some combination of “all of the above” will at least be attempted if tariffs become a reality.
Net - it seems feasible that not all of the tariff costs would see their way to consumer prices.
Regards,
-Chuck
Basic microeconomics tells us that’s true. The tariff gets split between buyer and seller, with the slope of the demand curve defining the split. The more elastic (the flatter) the demand curve, the more of the tariff gets paid by producers.
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OK, if you pass the tariff $ on to the consumer, you get inflation.
If you absorb the cost of the tariff, the stock price takes a hit.
If you split the baby, you get some inflation and some stock price hit.
I understand there are strategic reasons to add tariffs, especially if a foreign country is subsidizing costs.
But just adding tariffs willy-nilly is going to have an adverse impact somewhere, not to mention the possibility of trade wars (although I just did mention it).
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These seem odd solutions, given that even without a tariff it is in your best interest to “negotiate with your supplier for a lower price”, “find a domestic supplier whose total cost to you” is less, or “reformulate your products” to use a less expensive palette of materials.
These sound like excuses, not solutions. (Well, they would be solutions except that they should have already been employed if your managed is halfway competent.)
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That sounds like the start of a recession/depression spiral to me.
This is simple you do less business and workers get laid off pretty quickly. No profit no mission.
Without as much demand in the global economy, you get deflation.
The Chinese miracle was based on Chinese demand paying for local factories. Then, Chinese production was dumped on the globe. Not only did that end during the pandemic, but US demand has been holding up the global economy. That will turn south along with the global demand in general. Spiral.
Don’t forget the austerity being done as soon as possible. It is not like the foot will be taken off the gas when everything is going wrong.
The only thing that will sell at a premium is one big dunce cap.
Actually it’s exactly the opposite. The Chinese “miracle” is almost entirely supply side, with the central government encouraging local governments, and thru those local businesses to produce, produce, produce, even in the absence of demand. The malls with no stores and building with no occupants are just the tip of the iceberg.
But along with those wasted projects came other economy enhancing improvements: superhighways (which they had before they had a lot of cars, just the reverse of how it happened in the US) and bullet-trains, which most of the world (except us) is rapidly pursuing.
The Central Government targeted certain industries, realizing that they were vital to accelerating the moribund Chinese economy. Among those were automotive, batteries, solar panels, and more basic industries including power, coal, and steel. None of this was “demand sided” by consumers, it was Industrial Policy writ large, and by and large it has worked (obvious exceptions noted in the first paragraph.)
There is still a “demand side” problem in China, as people (like in other Asian countries) save more than they spend, making it hard for their economies to consume all they produce. The government has made small, halting steps to try to move the Chinese to a “consumer” (demand) society, but so far, it has only worked to a small degree.
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When it comes to managing ongoing operations, I’ve generally found that a “continuous improvement” mindset tends to drive better results over time than a “get it perfect up front or else” one. I also have generally found that laws, regulations, and other “mandatory externalities” tend to change over time.
In the absence of a perfect crystal ball, it’s usually easier, cheaper, and faster to operate, update, and negotiate contracts based on the current rules of the game, rather than on what might happen at some point in the future.
While it likely makes sense to prepare for potential tariffs as that is a stated “negotiation tool” of the incoming administration, it may or may not make sense to actually implement changes now, prior to any tariff actually being implemented.
After all, if a new tariff increases the cost of doing business the current way, then it drives a change in the rules of the game. That change might make some alternatives more attractive than the current approach, while they aren’t more attractive without the tariffs…
Net - while I would expect companies to adapt as changes in the rules are known, I would not expect them to be 100% ready for each and every potential change in those rules before those changes are even close to being known.
Regards,
-Chuck
It is not an either-or.
The factories were generally in massive cities were worker demand paid off the factories.
I said nothing about the construction trades.