Discussing the Impact of Tariffs
Reading this, about companies reacting (if the author is correct) to tariffs is not a good sign for us. We already have seen an example of the morality of companies in their downsizing of packaging (which has yet to go away) of their food product plus an adder of a few pennies here or there. And since it was announced, expect some increases whether needed or not.
“Businesses are starting to telegraph what wide-ranging tariffs — 60% on goods from China and as much as 20% on imports from everywhere else — will mean for their customers. (Hint: They’re going to raise prices.)”
Hint, they already raised prices during the pandemic and will not return to what was adequate pricing. Trump was not taken seriously by the voters who will now pay a price from which they thought they could escape. If you thought the pricing was bad during the pandemic and under Biden . . . just wait. China is a big enough economy to push back.
“The prevailing theory among many economists is Trump’s plan will increase prices and inflation as companies pass the cost of the taxes down to their customers.
We’re already starting to see that play out. AutoZone CEO Philip Daniele didn’t sugarcoat it on a September earnings call:
‘We will pass those tariff costs back to the consumer.’ (No Schooner Tuna mentality there!)
Walmart wasn’t as direct, but CFO John David Rainey said last week that the retail giant, which imports a third of its products, would “probably” raise prices in some cases.
There is also a chance prices could increase for stuff not even impacted by the new taxes. As was the case with inflation a few years ago, tariffs are a convenient cover for companies to raise their prices and enjoy a boost to their profits.”
We are not all in this together. Companies will do what they usually do, pass on 100% of the Tariff costs to the buyers of their products even if they do not have to do so.
“Some economists told Emily, “buying big-ticket items sooner rather than later could be beneficial. Electronics, furniture, and cars are among the items expected to be impacted.
But it’s a tricky balance considering nothing is official. Trump hasn’t wavered from his trade plans, but some still question how realistic they are.
Nobel laureate Simon Johnson said the tariffs won’t be as extreme as initially advertised. He told BI he views them more as a negotiation tactic with China and American companies with operations there.
And trying to get ahead of supply-chain issues can sometimes put you in an even bigger hole.
As the threat of port strikes loomed earlier this year, Target rerouted shipments to ensure it wouldn’t run out of products. The strike ended after only a few days, leaving the retail giant with a surplus of inventory that proved difficult to move.
While he didn’t regret doing it, Target CEO Brian Cornell partially blamed the entire episode on helping to drag down its third-quarter earnings result.”
Taken from Business Insider as written by Dan DeFrancesco, “A Trump Bump on Prices.” and added too.
I just have one question. The Fed raised interest rates to slow the economy and cool inflation. A slowing economy will result in job losses. The point of Trump’s tariffs and deportation of undocumented immigrants is to protect American jobs. Are the jobs he is trying to protect the same jobs the Fed is trying to eliminate?
Mark:
1. A slowing economy will result in job losses.
2. The point of Trump’s tariffs and deportation of undocumented immigrants is to protect American jobs.
3. Are the jobs he is trying to protect the same jobs the Fed is trying to eliminate?
Three can be or is the indirect result of one due to higher Fed Rates. The higher Fed Rate is to cool s hot inflated economy.
@Mark,
How exactly does deportation of undocumented immigrants protect American jobs?
That one question has multiple pieces, so let’s look at them individually
1. Fed raises rates – The Fed only controls the short end of the yield curve (basically overnight interbank borrowing rates). Banks traditionally set their Prime (Lending) Rate at FF+300bp (3%), so those will move in parallel.
But the long end of the curve is controlled by traders who judge the overall economy in the medium term (i.e., 5-10 years). They’ve seen consistent growth averaging around 2.5% (wide range, but mostly 1.5-4% with ~3% beginning the long tail) and know the Fed is targeting 2% inflation. So they’re not going to be persuaded necessarily that a rate cut will cause growth and vice versa. So mortgage rates will trend in the direction of the change, but not 1:1 by any stretch.
2. Job losses. The Fed has a dual mandate: maintain full employment and control inflation. It will surprise no one if I snark that the current Fed leader concentrates on the latter. So kicking U-3 to 4.5% or 5% from the current 4.1% (from Dec 2021 to May 2024, the rate was at or below [generally below] 4%) may just require slowing the rate cuts. Which cuts disposable income among the people who must dispose of their income and will cause everyone else to cut back as well. If prices were stable, we would assume there would be excess product and the price would have to come down.
2b. But throw in tariffs and it’s another story. You have raised prices with a deadweight tax so the demand is already going to be cut. Get back to the pre-DJT price and quantity is much lower. Less impact on imports, but the domestic equivalents don’t exist enough. Rare earths and solar panels are not made in the USA. Even clothing isn’t completely sourced here.
Unilateral tariffs just mean (for the foreign makers) that they distribute things differently–less to the US, more to Europe or Russia or China or… American goods producers mileage WILL vary, and not in a good way. They’re driving a BMW, we’re driving a Mini, at best.
3. Deport illegal aliens who have been living, working, serving, and marrying here for years. Trump did this a couple of times in his last term. One left Georgia without enough farm workers; guess where peach prices went. Scale that up and you can forget buying almonds, while the cost of everything else goes UP. (Either you replace the deportee with someone who costs more or the harvest/housecleaning/dishwashing doesn’t happen.
So, in all of those cases, prices go up–or at best do not fall enough. You can even assume–you’ll generally be wrong but it’s possible–that some exporters to the US will absorb part of the tariff in order to sell more. (Much more likely to happen if they are dumping product than engaging in continuous commerce). But the price still goes up, the employment still goes down, and the spiral continues until the new equilibrium. Back of the envelope: 6.0-6.5% U-3 unemployment and the market basket price up 8-10% annually over a three year period in the best case at the levels previously being discussed.
UPDATE: I wasn’t assuming tariffs on Mexico or Canada, since they’re limited/effectively banned by USMCA. (I wonder who was President when that was negotiated?) Put tariffs on them and China and the “natural” rate of unemployment goes back to the 5-6% it was in my youth–and I am old. Stagflation will look like a walk in the park, even if oil prices remain stable. Which they won’t if war in the Middle East happens, as opposed to “just” the genocide of the present. Throw in higher energy costs and you could make 1974/5 look like 1998-2000.
@Ken,
Great comment! Thanks!
This really deserves to be a post.
Joel:
Ken has the ability to post. I would welcome it, if he would do such.
not sure thinks they (Fed) only have one tool for inflation (no matter where it comes from) raise rates. which really doesnt help when the inflation is a physical problem (like a crashed supply chain, which really doesnt care about rates, i guess the Fed will raise rates to fight the inflation from Tariffs (and fail there too). course thats a political choice. and harvest etc wont be happening which will hurt the farmers and people who want to keep eating.