Tariffs, tariffs and more tariffs. There’s something about this whole tariffs farrago that is either ludicrously complex or exquisitely simple and I can’t quite decide which. But there are many players in this sequence. Let’s pick a single example of a country that makes cars and sells them to the US – we’ll call it LITTLELAND – that exports £100 million of cars to the US in the form of this 10,000 cars manufactured by CHEAPOCAR at £10,000 each. It costs CHEAPOCAR £8000 to manufacture each car. So the initial profit to CHEAPOCAR is £2000 per car (which incidentally will be taxed by the government of LITTLELAND) as it leaves the factories to the export company EXP2US. As the cars enter the USA, EXP2US is used to paying small import duties (let’s say 2%) to the US government. This makes each car imported into the US cost the dealers (SCREW-U) £10,200. SCREW-U will then sell the cars on at, let’s say a markup of £4800 making each car available to the customers at £15,000 apiece. SCREW-U makes £4800 profit per car.
Then let’s imagine a US president – we will call him FLORIDA ORANGE – who decides on a whim to increase the import tariff from 2% to 20%. This takes the price to the dealers from £10,200 to £12,000. Each car imported will now generate £2000 rather than £200 for the US revenue. SCREW-U now have cars costing them £12,000 each instead of £10,200 each. They now make £3000 less profit per car (a decrease of 37.5%)
Let’s summarise:
LITTLELAND – country of manufacturing cars
CHEAPOCAR – makes cars and exports some to the US
EXP2US – transports cars to the US and arranges import
SCREW-U – car dealer
These are the principal areas in which companies might have financial interests. Now I know it can’t be this simple because otherwise it would not have completely baffled the economists as to the rationale for these tariffs. But President FLORIDA ORANGE, clearly believes that he knows better than these proven field-if tested economists and that he can apply business rules to countries. I understand, and please correct me if I’m wrong, that FLORIDA ORANGE has a number of bankruptcies to his name so perhaps we should take his ‘famed dealmaking’ with a pinch of salt.
So who is going to pay for this nonsense? FLORIDA ORANGE clearly believes that it should be LITTLELAND which will have to pay £2000 per car to the US Treasury either directly or through CHEAPOCAR. Others may see it differently. But as long as the money is paid it matters little whether it comes from CHEAPOCAR directly, watching its profits from the individual cars evaporate or the same for LITTLELAND’s government. As for EXP2US, there is little incentive for them. Any money they might make will be eaten this up by the raised tariffs. The only obvious area of slack in the system lies with SCREW-YU, which will either have to take less money per car or pass the buck directly to the customer, presumably with some absurd justification. In the end it comes down to a very simple equation. Either Americans pay more for imported cars, or they don’t. If they don’t, then CHEAPOCAR suffers, making fewer cars.
Will somebody help me out here – because to me, this looks like global economic Armageddon. Please tell me I’m wrong. And why.