- January 14, 2019
- Posted by: Dr. Francesca Fajinmi
- Category: Manufacturing Business
By Francesca Fajinmi DrBA
Current tariff discussions in the media may impact various goods such as, industrial products(1), intermediate goods(2), and consumer goods. While the tariffs on industrial and intermediate goods may have an indirect and long-term impact on the consumer’s wallet, the effect of the tariffs on consumer goods can be seen immediately.
Effect of Tariff on American Consumer
Last year, President Trump imposed a 25% tariff on all linen products made in China. While you may not have seen the effects of this tariff yet, the prices of many common clothing products may increase this year. For example, take a pair of jeans that costs $100 to import. Assume the company adds an additional 40% for profit, so the price to the consumer is $140. With the additional tariff, the price to import has now increased to $125.
Keep in mind, the importer may need to borrow money to cover the increased tariff but we will ignore the possibility of this loan. Regardless, all additional cost will be passed down directly to the consumers.
The cost to import becomes $125, instead of the original $100. In addition, if the importer wants to maintain the 40% profit margin, the selling price will become $175(3). So for a pair of jeans you will now pay $175 instead of $140—a 25% price increase caused by the tariffs.
Effect of Tariffs on Demand
Price is one of the factors that affect the demand of most goods. An increase in price often leads to a decrease in demand for most consumer goods. If you normally pay $140 for a pair of jeans once every three months, you will spend $560(4) per year. If the price of the same pair of jeans increases to $175 and your income has not changed—that is, you still have $560 to spend on jeans—then it means you can only buy three pairs in a year instead of four.
If the company set the price of the jeans based on a demand of 100,000 pairs at $140 per pair, now that the price is $175, only 50,000 pairs can be purchased at this price. Not only does the company lose money, but the government does as well. The government would have expected $2.5 million(5) based on 100,000 jeans sold at $140, however at this new price, the tariff on the jeans for the 50,000 pairs may be $1.25 million(6). This not only affects the country’s GDP, but various workers may also lose their jobs.
Effect on Employment
If the retailer has a staff of eight to manage sales, inventory, shipping, etc., With the reduction in demand to 50,000, the retailer may have to lay off half of its employees to make up for the decreased revenue. This may result in four unemployed people. The four unemployed may go on welfare and require government support to cover basic needs through programs such as Medicaid and SNAP (food stamps).
Comparing the impacts in U.S and China
While many U.S consumers and businesses may be significantly impacted by the tariffs, the impact may be worse for China because they export more to the U.S than they import. In 2018, U.S imports from China through October was over $446 billion, while exports to China was $102 billion (U.S Census Bureau). The gap began to widen since 1989 to current.
Data Source: https://www.census.gov/foreign-trade/balance/
The US might be able to absorb most of the impact than the Chinese economy due to its high GDP. However, consumers will feel the brunt of the blow as it trickles down the economic ladder.
Francesca Fajinmi is a Global Manufacturing Expert. With her doctoral specialization in International Business, she has been an invaluable resource to the manufacturing business world. She has worked in over 20 countries in five continents. She partners with multinational corporations as well as small, and medium enterprises by providing cutting edge advice on all matters relating to Manufacturing. She is sought after by major business schools all over the world for this niche area of manufacturing expertise. She starts blogging to answer major questions posed to her due to her inability to respond to all topics on a one on one basis. Francesca can still be reached at Francesca@mfecorp.com.
1 . Industrial goods are needed to make finished products for the consumers. For example, equipment, raw materials and parts, and supplies.
2. Intermediate goods are partly finished goods in between raw material and finished goods. Mostly sold from business to business for the purpose of making a finished good for consumers. Steel used in the production of cars may be considered intermediate goods.
3. The new selling price is computed using the 40% margin on the new landing cost of $125. New landing cost of $125 plus 40% of $125 becomes $175.
4. $560 spent per year is derived from $140 per quarter multiplied by four times a year
5. The old tariff rate based on 100,000 pair of jeans will be 100,000 x $25, $2.5 million.
6. The new tariff based on 50,000 pairs of jeans will be 50,000 x $25, $1.25 million.