“Well the tariffs just went into effect, so the theory will now be tested.”
The tariffs will be on containers that left China on the 10th, so 20 days on the water and then time to deliver goods inland. I say give this about 90 days and you will see new prices on the shelves.
If you are calculating your consumer price based on landed cost (like all importers) then your cost just went up 25% and you’ll reprice your product based on the new cost. That’s right, companies will be making profit dollars on top of the tariffs. I don’t know why you think this has limited inflationary impact, it isn’t a pass-through.
As far as the small to mid-size companies getting into China, it was easy for them. Easy to source, easy to buy. Certainly, they will begin to try sourcing products outside of China, but it will take some time, and all the while the consumers will be paying for these tariffs at the cashier. This impacts the wallet of the voters, and Trump is putting 2020 at risk by upsetting farmers and consumers as they see only negative impacts to their buying and selling.
Better strategy would have been to offer substantial tax breaks for companies that either buy domestically in the USA or from approved fair trading partners. I would much rather see American companies given incentives to resource that don’t harm the buyer, or impact the economy in the way these tariffs will.
“I say give this about 90 days and you will see new prices on the shelves.”
That sounds about right. Timelines for each product will follow their own timeline - some will raise prices right away because of the companies financial needs or opportunity, some with big inventories or long timelines to final sale will lag. But a few months for the stuff just loading on the ships will probably be the bulk of stuff.
“I don’t know why you think this has limited inflationary impact”
For a few reasons.
1: Substitution with other suppliers. Some major producers have been preparing to move for two years already. Other products are easy to substitute, as soon as there is a small price advantage. The next order just goes elsewhere. They may pay somewhat more than currently, but not the full 25%. Other substitutes that are not yet ready, might lag a year or two, but more will come online over time, if the incentives are there.
2. Chinese discounting and currency manipulation. They are going to have to compete aggressively, and the Government has historically been reliable in manipulating their currency to manage trade. They depreciated the Yuan 5.5% to offset the 10% tariffs.
Sun7, on another thread (post #98 http://freerepublic.com/focus/news/3748230/posts?page=99#99), posted: “...analysis from the Economist which categorizes all the 25% tariffed goods and comes up with the result that China will pay 20% and the US (importers and consumers) will pay 5%, and that Chinese exports could fall by 42% as a result. Another estimate out of the European Union puts the numbers at China paying 20.5% and the US paying 4.5%.”
3. Total volume. Our total GDP is close to $20 trillion, but about half is services. So call it $10 trillion in goods. $200 billion (2%) of that will get this new 15% increase (0.3% price increase of goods overall, if there was no discounting, substitution or exchange rate offset). Some categories of goods won’t be effected much, like food and fuel, so prices raises will be more concentrated in other products like manufactured items, but the overall inflationary effect is small in percentage terms to our economy.
So while there will probably be some particular marquee items that could be highlighted to show a significant price rise to the consumer, the overall impact on the Consumer Price Index (CPI) would be a small fraction of a percent - far less than the effects of the Federal Reserves policy decisions. If the next (bigger) round of tariffs are imposed, the maximum impact theoretically might reach a full 1%, but I doubt that for the other reasons listing. Even if it did, it would be followed by reductions over following quarters, as substitutions are inevitably made.
“Better strategy would have been to offer substantial tax breaks for companies that either buy domestically in the USA or from approved fair trading partners.”
This has been addressed in a huge way, on the supply side. The first step was to make US production cheaper, and free up capital the investment needed. Then finally, after the alternatives are ready, Chinese goods would be made more expensive.
The historic tax cut package early in President Trump’s tenure made production in the USA dramatically more competitive. It also allowed repatriation of $2 trillion dollars of corporate earnings, which had to held by overseas subsidiaries under the old tax rules. The tax cut package also made it especially attractive to invest capital in productive plant and equipment in the USA, by allowing full expensing in the first year. Also, historical (and strategically targeted) reductions in regulations made it significantly easier/cheaper/quicker to invest, build and hire in the USA.
Companies were also briefed to expect this, so they could plan accordingly. The Trump Administrations had groups of companies rotating into the White House to give them the heads up, starting their very first week.
Our other major trade partners (Mexico, Canada, the EU, Japan and Korea) have all renegotiated their trade deals with the USA (unprecedented). A factor in all of those negotiations, was implementing measures to control trans-shipment of Chinese products (so-called “back doors”), as well as Chinese component percentages of products.
Conditions have been carefully set to make tariffs more effective by first closing such “smuggling” options, and also by preparing the US side to efficiently make the most use of the market opportunity. So now comes the step of making the Chinese goods more expensive, by putting tariffs on them.
Rather than subsidizing buyers to buy American (which is an illegal subsidy under the WTO, and would be a large perpetual cost to the Federal Government), the Trump Administration has made more efficient use of targeted tax breaks for investing in American manufacturing, and reducing costs to American manufacturing through de-regulation.
In the end though, without tariffs, the communist regime can continue to lie, cheat and steal their way to a competitive advantage. The tariffs are critical geo-strategically, in and of themselves. The revenues from unfair trade are nurturing a brutal dictatorship that is aggressively determined to dominate the USA and our allies. Either we pull back the fire hose of trade funding now, or the cost will be much worse later.
Tariffs on communist China are a cost we would be wise to pay, and which we can well afford. The initial costs will be repaid many times over through increased long term domestic business, employment and their resulting tax revenues.
The hype from the pro-Leftist press will be much worse the underlying bite to our real economy. We can expect a lot of Leftist media to run scare stories to attack President Trump, and at the bidding of the Chinese, through their paid for agents of influence in the USA.
I see BeauBo already had a very well-reasoned reply for you. Here are a few more points.
1. Whatever % of the tariff gets added to a business’ cost, it is unlikely the entire cost will simply be passed on to the consumer unless the business has a monopoly. Consumers can always switch brands or stop buying the product altogether.
On the other hand, a rise in energy prices is inflationary because it affects every business and individual, and no one can easily ‘opt-out’. But we’re not even remotely talking about energy prices here.
2. It is a myth that many businesses unaffected by the tariffs would use the occasion to raise prices. They may lose market share and risk pricing themselves out of the market. 16 oz. of Planters peanuts used to cost almost $5, but in the last couple years, it has come down to $2.5. Clearly it is an effort to regain market share lost to all the store brands selling for $3.
After tariffs are in effect, it is just as likely many businesses will see increased sale with their lower prices and will be happy to keep it that way. We just don’t know, so it shouldn’t be used as an argument against tariffs.
3. Your proposed tax breaks simply cannot get the job done. What is needed is a quick, high-power precision (economic) bomb over the target, so to speak.
But first, from your #51, objecting to the tariffs, you wrote, “However, what about the small and mid-size companies that rely on China to supply them their goods? Do you think THEY have the resources to establish presence outside of China?”
Does this not also argue against your proposed tax breaks? To wit, if a 25% tariff is not enough to incentivize these companies to move away quickly from China, what kind of tax breaks can you propose that can do the trick?
If you don’t already realize, the goal of the tariffs is to STOP CHINA. Buy American or buy from fair trading partners is just a nice side effect of it.
And you seem to have forgotten the degree to which the CCP controls every aspect of their trades. They can pay their exporters enough subsides to undercut any tax breaks we could ever provide. They can sell at a loss just to maintain their market share because the government is behind them. Where have you been all this time when we complain about their unfair trade practices?
There should be an urgency to stop them especially since a few years ago they launched the ‘Made in China 2025’ and the ‘Thousand Man Program’ (not official name) to help them transition from low-end manufacturing to become a producer of high-tech. These programs are essentially bribing programs aimed at recruiting top scientists in the west (mostly in US, of course) by offering them prestigious positions in Chinese companies or universities with high pay while they keep their jobs in the west, thus establishing a direct and seamless transfer of technology to them. I’m glad the President didn’t wait any longer to tackle them.