An Early Christmas Gift from Santa Trump
Close call! Dodged that bullet!
Huh? What just happened?
Recently, President Trump announced new 10% tariffs on $300 billion worth of products beginning September 1.
Immediately, global stock markets tanked. Bond yields dropped. Gold prices moved up. And then – cue somber music! – China allowed its currency, the yuan, to tumble for 48 hours.
Whoa! Man the lifeboats!
A week later, Trump announced a delay in implementing tariffs until December 15. The idea, he said, is to allow U.S. importers to stock up on Chinese goods for the upcoming holidays.
“We’re doing this for Christmas season,” said Trump. “Just in case some of the tariffs would have an impact on U.S. customers,” he told reporters.
How sweet… Trump wants to be Santa Clause. Not the Grinch who taxed Christmas. No Scrooge is he; not Donald J. Trump!
Thus with one hand, Trump giveth tariffs; with the other he taketh away.
Truly, a “Christmas Carol” story to rival that of Charles Dickens. Thank you, Mr. President…
Yes, thank you, Mr. President… Although I have to say that on my end, I don’t pay tariffs. In my entire life, I’ve never written a “tariff” check to the U.S. Treasury.
I don’t pay tariffs because I don’t buy goods directly from China. Somebody else might pay tariffs on goods from China. Not me.
Okay, slight correction… Full disclosure… Every now and again I buy mineral specimens on eBay from sellers in China. Like these beryl crystals (aka emerald) …
Chinese beryl/emerald specimens. BK’s collection.
It’s a vice, I suppose. I collect mineral specimens. I have an open eye for nice articles.
There are many mineral sellers in China, vending their pretty wares on eBay. If I like something and the price is right – and most often, I haggle – I click and buy. A few weeks later, a well-wrapped box shows up with all manner of Chinese characters, postage marks and customs stamps.
It’s what’s called win-win trade. I get what I want; they get paid.
To the best of my understanding, I’ve never paid a tariff. I just pay through eBay. I’ve never seen a tariff markup.
So, if not me, then who pays tariffs? Well, unless you deal directly with Chinese exporters, it’s not you either…
U.S. importers pay tariffs.
Think of the big guys… When Walmart or Target, for example, buys containers filled with Chinese goods, they pay tariffs when the goods land at a U.S. port. Or if a steel company imports Chinese slabs, when the crane sets metal onto the flatbed truck, the U.S. importer forks over a check to the U.S. Treasury.
Import Chinese goods, and pay the tariff… Seems simple. And that might be the basic story.
But it’s not the whole story.
Let’s use an example; say, a microwave oven sitting on the shelf of the local big-box store, listed at $100. With a 10% tariff, it now “ought” to be $110, right?
Nope. Not even close.
That “$100 microwave oven” may have only cost the retailer $50 at the loading dock in China. (Probably much less, actually; I’m just trying to make the math easy.)
The other $50 of the shelf-price at the store is the importer’s internal costs for shipping, handling, overhead, markup, etc. So perhaps the true tariff – the actual tariff on the value of the basic Chinese import – is a mere $5; that is, 10% of that original $50 paid to the Chinese seller.
Now what? That $100 microwave oven, with tariff, now “ought” to be $105, right?
The $105 is comprised of the original $50 paid to the Chinese seller, plus 10% tariff, or $5; and add on the importer’s internal $50 costs. Comes to $105, yes?
It gets back to that $50 retailer handling, overhead, markup, etc. There’s room for slack. The retailer may adjust the shelf price by a buck or two (or three). Eat some of that tariff out of the overhead, etc. Point is, the paying customer still likely won’t see much of that $5 tariff at the checkout counter. The retailer will discount.
Meanwhile, back at the point of sale in China, the U.S. buyer’s representative has surely told the Chinese manufacturer/seller to cut the price from $50 at the loading dock. Let’s say, down to $46, in order to make the sale. The Chinese manufacturer sucks it up and takes the hit. Now, with a $4 adjustment, 4/5ths of the $5 tariff just went away in a “net” sense.
Plus, consider that China can allow its currency to slide in value; it just did, in fact.
In other words, a now-$46 Chinese item is still $46 at the loading dock, when paid-for by the U.S. buyer; but the Chinese producer has received yuan-equivalent with slightly less value as against dollars.
Net-net, a 10% tariff can easily come out as nothing – a big, fat Zero Dollars – or nearly nothing to an American buyer prowling the aisles at the shopping center.
That’s why I say that I don’t pay tariffs, and neither do you. It’s all in the adjustments across the manufacturing-sales-payment cycle. So much for Santa Trump saving Christmas.
Of course, it’s not quite that simple. For some products, in some instances, tariffs absolutely flow through to the ultimate U.S. price tag.
Some American buyers will very well see some price increases on some Chinese products, per Trump’s tariffs. Again, cue somber music…
For example, the Wall Street Journal loves to bash tariffs by telling stories. There’s a U.S. beer keg manufacturer whose steel costs have risen due to tariffs. And there’s the nail-manufacturer, whose costs for steel wire have risen. And automakers, with higher steel costs. No doubt; although there’s more “cost” for workers’ health care in the price of a car than cost of steel.
Or take a different economic sector; namely tariffs on electronic products like laptop computers, smart phones, television screens, cameras and such. It’s a vast volume of products with the “Made in China” label; and yes, tariffs will likely flow through to the consumer and cash register in one form or another. But…
We live in a “globalized” economy, remember?
Inside any given piece of “Chinese” electronics, you might have computer chips from the U.S., circuit cards from Japan, plastic from Saudi Arabia, glue and color resins from Germany, glass from South Korea… assembled and beautifully packaged at a plant in China. Then shipped to the U.S. on a FedEx or UPS Boeing-747 airplane, filled with fuel from Chevron.
When it comes to calculating tariffs, what’s the true value-add from China? The most accurate answer is… It’s very hard to say.
Which brings us to the other angle – the real angle – on Santa Trump’s tariffs, and/or his Christmas-spirit delay in imposing them.
There appears to be a deeper idea behind Santa Trump’s tariffs. They’re not simply a crude border-tax, with which to bash China and somehow raise funds for the U.S. Treasury; although that is what it looks like at first appearance.
The strategic meaning of Trump’s tariffs is to interrupt the flow of capital and leading-edge tech into China, while also pulling at least some manufacturing out of China to other places; ideally, back to the U.S., but at least to ABC – “Anyplace but China.”
Think back… For 30 and more years, the global growth story has been China-China-China. Boatloads of stuff going to China for the big buildout of gleaming coastal cities and half a continent full of export-oriented factories.
Iron and coal from Australia. Copper from South America. Oil and plastic feedstock from the Middle East. More cement poured in one decade in China than in the entire United States in the past 100 years.
All that, and tech transfer… Voluntary and involuntary.
For example, in the 1990s and early 2000s, Chinese reps went to high-end electronics makers and offered assured supplies of rare earth elements (REEs)… if they located manufacturing plants and related tech research into China.
Also in the 1990s and early 2000s, China dangled lucrative contracts to foreign railway equipment suppliers… if they relocated facilities and transferred tech to China, which eventually transformed into a Chinese rail manufacturing base.
In 2010, China’s Geely Holdings bought Sweden’s Volvo; one of the world’s high-end, prestige automakers… and now Geely/Volvo manufactures a significant portion of the Volvo company’s cars in Daqing and Chengdu.
I could list literally hundreds of similar stories across many an industrial sector. And one could argue that it’s the natural ebb and flow of modern commerce. Except when you track things, the China buildout story is a whole lot of ebb and very little flow.
The short version is that China has an “all of government” approach to its own domestic development. It’s run by a thoughtful program, well-administered (gotta give them credit!) by a vast bureaucracy controlled by the Chinese Communist party (CCP). And it involves everything from sending really smart Chinese students abroad to learn everything they can at foreign universities, to full-spectrum industrial espionage and military-level spying.
Perhaps you’ve heard some stories; and really, only some because many of the “real” stories are tightly classified.
I’ll just hint at how much of the U.S. nuclear weapons database was compromised by Chinese operatives in the 1990s. Or how in the 2000s, F-35 aircraft tech was essentially “downloaded” from poorly-protected servers at the contractor and even U.S. military level.
It’s all this and far more. Every day. Every hour. China has an entire army division that does nothing but hack computers across the world.
But let’s return to the original theme. It gets us back to where Trump’s tariffs come in.
If nothing else, Trump’s tariffs – and now, the on-off application of them – complicate investment decisions for people and companies who are considering moving into China; and expedite decisions to move things out, where possible.
The ultimate manner and effects of the Trump tariffs remain to be seen. We’re in early innings. Batting practice, even.
Still, we’re already seeing a migration of textile plants, for example, out of China into Vietnam and Malaysia. Once companies move those factories out of China, they aren’t going back.
In another sector, we’re seeing investment in electronics plants redirected out of China to other locales. For example, one big U.S. “get” is the possibility of Apple supplier Foxconn moving some of its work to Wisconsin. It’s a long-term program, likely dependent on the 2020 election. But Foxconn in Wisconsin? That’s telling.
Here’s what to keep in mind. When Trump talks tariffs, it’s not about some crummy 10% surcharge, one way or the other, on microwave ovens or laptops or steel slabs.
Trump’s tariffs are about disrupting global capital flows.
Trump’s Tariffs are about redirecting capital and tech away from a rising China, and putting the funds into growth in other parts of the world.
Likely – we must at least hope – over time, tariffs will redirect some new investment back into the U.S. Meanwhile, beginning now, many other foreign nations are also indirect beneficiaries of the U.S. effort.
Trump’s tariffs are finally placing some small semblance of restraint on the China-China-China growth story. Call it an early Christmas gift from Santa Trump.
Indeed, foreign embassies across Washington, D.C. ought to be placing advance orders for Christmas fruit baskets to send to the White house, in gratitude for all the new flows of investment capital that Trump’s tariffs are directing their way, and out of China.
As for us here in the U.S.? Enjoy your cheap microwave oven. Merry Christmas.
On that note, I rest my case.
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Managing Editor, Whiskey & Gunpowder