Tariff Trivia
[A certain type of reader will parse this article for ‘tariff good’ or ‘tariff bad’, and respond from that basis. Please be a superior type of reader]
I’m in a line of work where I get to talk to people from various walks of life.
I find everybody’s occupation interesting. I once met a lady who worked in taps (faucets). I asked her what was going on in the world of taps and actually there were some big things happening with regards to new efficiency standards.
The new US tariffs seem to be affecting everyone I talk to, and I’m hearing some enlightening stories.
Here’s one, which is not directly related to the new tariffs but which is illustrative anyway:
There’s a guy who works in a car factory for a German brand you know well. He was talking about how they deal with existing tariffs in both China and the EU. I’ll fudge a few details here for privacy’s sake.
It goes like this: a car sold to China cops the tariff if it is more than 50% manufactured outside China.
As you can imagine, there are many judgement calls to be made in assessing what ‘50% Chinese-made’ means. For example, what about the engine? How much of a car is that?
Apparently the engine is 8% of a car for Chinese tariff purposes. However, it’s rare for a part as complex as an engine to all be made in one country these days. Bits come from here and there to be assembled.
In the German factory, a large component of the engine arrives from elsewhere to be installed. This one component counts for more than 50% of an engine for accounting purposes. There’s a red sticker indicating those that came from the Chinese factory and a yellow sticker if the identical component was produced in the company’s Polish factory.
It’s vital to keep track of which is which, because once you put that Chinese component in the engine of the car bound for the Chinese market, all 8% of the engine now counts as Chinese. Carefully continue this process and you end up with an officially 51% Chinese-made car that can be sold tariff-free in Shanghai!
Through extremely complex maneuvers like these, car companies (and others) work their way around tariffs as best they can. They carefully assess tariff policies as interpreted by customs officials in various jurisdictions and plot where to produce each part, together with the usual considerations like labour cost, regulations, reliability of power supply, shipping infrastructure etc.
Thus, manufacturers of complex products don’t care very much if there’s a 10% tariff here or a 20% tariff there on finished goods. They’ll figure out a way to make it work.
However, there are two things worse than tariffs for these kinds of businesses.
The first is the blanket tariff. This is a killer compared to a tariff specifically on finished cars (for example) because each time one of those engine components crosses a border, they have to pay an additional tax on it. Supply chains are complex these days. With a blanket tariff, you have to recalculate and change everything.
The second, even worse thing, is unpredictability.
The new US tariffs are unwelcome but big companies can find their way through. CEOs get paid big bucks to figure out all that complexity.
However, there’s not much they or their galaxy-brained consultants can do when things keep chopping and changing.
Imagine that the German car company alluded to earlier calculates that if it just moves the engine assembly and chassis assembly lines to Detroit, it can tick the necessary boxes to avoid the US tariffs. All good right?
Well no, because Trump keeps changing his mind. If he later reduces the tariff in response to concessions from the EU, those new assembly lines in America would become unprofitable.
There’s also the obvious risk that the next administration might drop the Trump tariffs or modify them.
These assembly lines are not turnkey industries that can be set up, closed down or relocated cheaply and instantly. They take years and huge sums of money to establish. And then there’s the time it takes to train staff and so on.
If the tariffs keep bouncing up and down and all around, businesses will stop making investments that may be affected.
The less lucrative but lower risk move at the moment is to focus on the Chinese market, as the CCP is pretending to be stable and reliable in order to take advantage of the present situation, and is hoping no one reminds businesses how capricious they can be.
I don’t want to get bogged down in retail politics here. I’m trying to describe a world that I get a bit of an insight into.
There’s now an audiobook available of Poor Man’s Guide to Financial Freedom:
