Chinese Tariffs:
The Facts
The liberal press and never Trumpers are out in force pretending that the tariffs that are hitting are a tax on the poor and middle class. The claim is that everything becomes 15% more expensive as a result of the trade war.
Nothing could be further than the truth.
Here is one email sent out last night from a supplier that imports everything from China:
“Our prices will increase modestly because we are working hard to mitigate the impact of the tax increases on our customers. We are working with our factories to reduce costs; we are working with factories in countries that are not subject to the tariffs; we are absorbing as much of the tariff costs as we can.
As we have said previously, a 10% tariff does not imply a 10% price increase. The increases will be much lower than that, from 1% up to a few percentage points. “
What people don't understand is the vast profits made by importing products from low cost labor countries into high labor cost countries like the U.S.. An example is the simple ABS plastic cabinet leg. These sell for around $3.00 each in the U.S. But can be sourced from China in fairly small quantities for around eight cents. Few need a container load of cabinet legs but you can air freight them for about sixteen cents each, putting your import cost at 24 cents. Now apply that 15% tariff... six cents, bringing your total landed cost at 30 cents, one tenth the retail cost.
Or a sheet of MDF that sells locally for $31.00. They can be sourced from China for under $10.00 per sheet if bought in a 20' container load, about all a truck can legally haul on the roads. You will add $3.00 per sheet in shipping, port charges, and brokerage costs, winding up 2.3 times cheaper than the local retail price plus you are paying use tax of 4.5% on $13.00 instead of 8.375% on $31.00. That 15% tariff isn't going to be a big enough part of the total delivered cost to matter. But, it is enough of a cost to matter to the manufacturer of the MDF. They started fleeing China about two years ago when an anti dumping Obama era claim was upheld and the price of hardwood plywood import tariffs jumped to over 250%.
China subsidizes exports and pays a percentage to exporters for every dollar worth of exports. It hovers around 8%, enough that many Chinese manufactures will produce a product and sell it at cost and take the 8% as their profit. China also subsidizes shipping and port costs, allowing exporters to provide free ocean shipping and zero port fees or brokerage costs on exports. All the importer pays is the local port fees and brokerage costs and these can be around $2000 per container load.
What caused jobs to be exported to China in the first place was greedy retailers demanding to double the cost of a product for stocking it, advertising it, and selling it. The manufacture had to live on thin profits after building the factory, sourcing the materials, absorbing the waste factors, paying the labor and product liability costs and shipping costs. The store unpacks the box and sets it on a shelf and expects ten times the profit the manufacturer makes. Back in the early eighties a furniture store would mark up a locally made product by 25 to 30%. Then came a flood of Taiwanese imports that allowed a 100% markup, doubling the cost of the goods. Retailers started squeezing their remaining local and U.S. based suppliers and more and more companies found themselves forced to open foreign factories or purchase components there to assemble in the U.S..
Now the retailers find themselves being put out of business by the online sales outlets that will accept low margins. And the manufacturers own online stores offering the products at a reasonable retail markup to cover sales costs and fraud. Shipping has turned out to be the major choke point with companies like Amazon able to drain 15% of the value of a product due to their extremely low shipping costs brought on by economy of scale. Many of the same Chinese suppliers have in turn started selling the products directly on Ebay and Amazon, much of the time for very little over the wholesale cost and shipping. The U.S. Postal Service hasn't helped with their small package deal that allowed a package to be shipped from China for a fraction of what the same package would cost to be shipped from the same town. The Postal Service is ending that agreement though which will help Americana retailers and manufactures thanks to Trump's push to end the agreement.
Sure there are companies hurting in the short term. The idiocy of putting a 250% tariff on hardwood plywood but allowing the ready to assemble cabinets made out of that same hardwood plywood to come in for nearly zero tariff or tax wasn't good for the cabinet industry or furniture industry but the trade associations of both got organized and are now asking for the same anti dumping tariffs on RTA cabinets and furniture. The dirt cheap Chinese cabinets are going to go up enough that a frugal U.S. factory can compete.
But free trade.... bleat the libertarians and liberals.... Well free trade depends on a level playing field. At some point you choke off all manufacturing of products that can be shipped at a reasonable cost. High value items are imported, heavy items like paper and cement can survive locally. The problem is that manufacturing is more than providing jobs, it also provides a deep manufacturing base that can respond in time of war to enable the country to survive. Furniture factories turned to making ammo boxes and other war goods in WWII, even making airplanes in Britain. Auto factories churned out planes and tanks, washing machine companies and sewing machine companies churned out machine guns and artillery shells.
But you can't make a single product without hundreds of other products. You need paper for the sales order, ink to write it or print it, a factory to produce the widget, with everything from toilet paper to machine oil, to fasteners, to cardboard boxes in order to actually produce the widget including enough skilled labor and machines to produce the war product. You need machines to make the machines, foundries, a steel industry, a copper industry, an aluminum industry, and hundreds of thousands of supplies and materials to be made available. One aspect of the exodus of American furniture factories in the eighties was the loss of finishing material companies, fastener companies, and even tool suppliers, most of which followed the factories to China. The ones left in the U.S. are reselling imported supplies for the most part.
Anyone with any sense saw the warning signs given last year and had already started sourcing imports from other countries. Thailand turns out some nice MDF sheets and Taiwan can supply Taiwanese produced hardware so trading with China isn't required.
Trump's trade policies are much needed and long needed. Short term pain will happen. But no country can survive by exporting the single most profitable part of producing goods, the manufacturing. A country selling cheap food and raw materials is no country at all and all importing Chinese goods does is prop up a tyrannical country that uses prisoners for living organ donors and tissue donors. They don't execute prisoners, they harvest their organs and tissues and the prisoners die on the operating tables.
