Tariffs and Prices

Having spent much of my life in parts management and with setting prices for companies, let me give an overview of tariffs and prices:

Basically, I calculated prices by taking the actual price paid for goods, add the hard shipping costs (UPS, Air or Sea and local delivery) and then add Customs and Duties (C&D). This is my “landed” or “dock” cost. The C&D are usually determined by INCO terms.  The INCO terms state if the seller or the buyer is paying what costs of a transaction.  After adding all the above up and taking into account stocking and warehousing costs, I would have a multiplier to come up with my selling price.  The multiplier established the cost of sale, and I had to take into account things like competition, total markup, warehouse and dealer prices and of course my companies procedures.

If a product had an unusual tariff, such as an anti-dumping surcharge, I would have to figure that into my price or look elsewhere for a product without the tariff.

In today’s world we have a very stable supply chain. There may be alternate sources for a product, but they usually come from the same country and it takes months, if not years, to establish a new manufacturing plant.

So what about the new tariffs?  Say we have a product with a cost of 100 dollars ($100.) and a 20% tariff.  So the product would still cost  $100, but I would have a $20 per item cost added in my C&D.  Now this does not mean my cost or my selling price would go up 20%,  but it would have an impact.

What about the supplier paying the tariff?  The only Inco term normally where this happens is DDP.  It would make more sense for the supplier to lower the price of the good.  So maybe the part becomes $90. With a tariff of $18.00. My cost would then be $108, better than $120.  Unless the supplier has a incredible markup in his product, this is not likely to happen.  He still has to pay his expenses and his workers.

What if I eat the tariff?  Well then my company makes less profit and there is less money for raises or research and development.  I am not a tax expert, but a large company might be able to claim these costs against profit.  A small company may not be able to write off these costs.

Now, why has the tariff costs not hit hard yet?  Some companies work on FIFO (First in-first out) and some on LIFO (last in - first out). Some work on weighted averages.  FIFO dampens the effect of increasing costs, weighted averages dampens all fluctuations.  Other things that can cause prices to change are currency fluctuations, shipping costs (remember the fuel surcharges)  amongst others.  Companies using LIFO might have wildly swinging prices, based on the daily cost of materials.  Once you pick and accounting system, you cannot just change at a moments whim.  This would of course affect your profits and of course your taxes so it is discouraged in the Fiscal year.

So if the proposed tariffs stay in effect, you will see prices rise until they stabilize.  This might take 6 months to a year, once new goods make it to market.  The bottom line is that if all that happens is that the companies pay the tariffs, and no business moves to American manufacturers* then the tariff is just an addition tax paid by the consumer.

*For the tariff to lower prices on goods, an American manufacturer would have to be able to produce the product at less than the tariff price.  Right now no manufacture would invest in a new factory, knowing that if the tariff might be removed, they would be right back at the same disadvantage as before.