All About The New Trump Tariffs, And Why The Hysteria Is Overblown

by Tyler Durden

Sunday, Feb 02, 2025 – 02:35 PM

By Peter Tchir of Academy Securities

Some Tariff Basics

Report after report I read seems to jump straight to either the good from tariffs (getting others to pay our taxes, advantage to American manufacturing, etc.) or to the doom and gloom of tariffs (inflation, trade wars, etc.). While we all understand the basics of tariffs, or at least I think I do, it seems worth spending a minute or two making sure that we are all on the same page.

My understanding is that the importer of a good pays the tariff to the government at the port or place of entry of the good into the country.

So, if you pay $100 for something from Canada or Mexico, you pay a $25 tariff, and your cost has increased to $125.

Which begs the question – who pays the $25 tariff?

One of the first things most importers will do is ask for a reduction in price from the exporter. If I was doing business thinking that something was only going to cost $100 and it now costs $125, I’d try to negotiate my purchase price down.

What I find “interesting” is if the exporter takes a 20% haircut, the price stays at $100. 20%off of $100 is $80. Then a 25% tariff on something for $80 is $20, getting us back to $100.

Step 1 is getting a discount, where even a 10% discount means the tariff only increases costs by 12.5%.

Now let’s look at the FX market (which maybe we should have done before step 1, but it would be a pain to rewrite stuff, and it isn’t really a step, as it is outside the control of the importer and the exporter, though no less important).

Since the summer, the Peso has declined by 20% versus the dollar and since late September, the Canadian Dollar has dropped by around 18%.

Let’s say that back in September, a Canadian exporter was happy to get paid 135 CAD. That translates into 100 USD for the importer. Let’s say that the Canadian exporter is still happy to accept the equivalent of 135 CAD. That drops the USD price to 93 for the importer. Making the “new” cost to the importer, including the tariff, “only” $116.25. This is all moving around in real time and has been a cumulative move, so this is a massive oversimplification, but still relevant.

The currency market is already helping the importer.

Step 2 is for the importer to figure out what amount of profit he is willing to forgo, if any. Assuming the importer was paying $100 it seems reasonable to assume that the price for the consumer is significantly more. For argument’s sake, let’s say the final price was $200. There is distribution and selling costs, etc. that the importer pays to sell the product on to the next leg. Maybe $200 is too high? Possibly, but I’m not sure it is that unreasonable for many finished goods. Now $25 out of $200 is “only” 12.5%. Giving up 12.5% is probably too much, but is 5% reasonable?

So, let’s look at this possibility (which as a whole, doesn’t seem too far-fetched to me).

Negotiate a 10% discount from the Canadian or Mexican exporter. Argue that it is “temporary” but crucial if you don’t want me (the importer) looking for alternative suppliers. Add in that you (the exporter) will also take a hit.

So, the Canadian exporter reduces the cost from 135 CAD to 121.5 CAD (in hopes it is temporary, and they don’t want to risk losing this customer to another provider of such goods).

Due to the big increase in the USD, the cost is only $83.40 (the importer has been making a lot of extra money in the past few months, but that is always a risk and may well have been hedged).

The 25% tariff is $20.85, bringing the total cost to $104.25.

In your planning, as of a month or two ago, you were anticipating a cost of $100. It is now just under $105. Do you raise your final prices, or leave them, at least for a little while, anticipating Canada (or Mexico) will make progress on fentanyl and the tariff will go away? That seems at least plausible, and it might depend on how easy it is for you to raise and lower prices. Is the hit to profit margin, hopefully a temporary one, worth not having to deal with a new supplier?

If the alternative supplier is Canadian or Mexican, they have the same problem.

If the supplier is from elsewhere, presumably there will be some logistics in getting their goods over in time.
The alternative, an American supplier, does look better as they were just given an effective cost benefit, but not really a 25% cost benefit. The dollar strength takes away some of the desire to shift to a domestic supplier. Presumably, the domestic supplier was already more expensive (or not as good, or there is some other reason why they weren’t being used). So, even with the indirect competitive boost, is it worth it?

Read more here: https://www.zerohedge.com/markets/all-about-new-trump-tariffs-and-why-hysteria-overblown