Prominent members of the administration and Democrats in Congress have also been wailing about tariff-induced price-raising collusion or even "greedflation." So, many larger businesses are probably pondering the political blowback that might come from booking near-term windfall profits by pricing at opportunity cost.
A very thought provoking article. Thank-you for sharing it. I am watching the ranchers here in southern Arizona explain their issues with the tariffs and President's Trump desire to but beef from Argentina. Also, my farmer friends in the Midwest are taking a beating over tariffs with China. (China is not buying American soybeans) Just because prices haven't raised yet, doesn't mean that they won't. (Also, thank you for allowing me to comment many authors on substack hide comments behind their paywall. Just my humble opinion, hope I haven't upset anyone. )
My company costed our inventory at replacement cost and would charge prices on a margin computation upon notification in advance of the actual cost change taking effect for a nice arbitrage. My guess is your CEOs company is doing the same thing, whether they know it (or will admit it) or not.
I think everyone down here in the trenches understands that tariffs will make foreign goods more expensive. I buy a fair amount of hobbyist-type robotics and micro-controllers to feed my electronics addiction and benefited tremendously from the de minimis provisions. I suspect those prices will go up significantly next year and I may have to go into an addiction treatment program. However, I don't think economists like yourself have even begun to factor in just how much pain the ordinary American is willing to endure to level the trade playing field with our foreign markets and rehome a lot of the industry that went away when everything got outsourced to 'everywhere but here'. We can do with a bit less, but just the thought of shafting the uni-party elites who have been selling our country to the lowest bidder for decades would offset a lot of the pain
I think you are right that about 50% of Americans will not care that there is a one-time jump in retail prices --- willing to take the pain, as you say. But good economists always ask, "and then what"? Quick on the heels of the entirely noticeable uptick in retail prices will be the midterm elections.
Willingness to pay is not the same thing as ability to pay. How long will it be before rising prices convert to "vote the scoundrels out"? Many of the same 50% of Americans who are willing to tighten their belts to re-shore retail goods are people who cannot afford another 10%-15% jump in retail prices.
Oh, by the way. Where is the money from the jump in prices going? It's going into the coffers of the U.S. Treasury. What will the government do with that money? Anything and everything except what the payers of the tax would have done with it.
One of the things you miss completely is the reality the consumer controls the price they pay and whether they absorb any of the tariff.
Allow me to use a real world, personal example: I love Canadian maple syrup on my pancakes. It is decadent.
I have 3 young granddaughters who are smitten w my pancakes and my favorite Canadian made syrup.
Alas, the price of my favorite Canadian maple syrup — delicious elixir — increased rather dramatically.
Confronting that painful economic reality, I researched domestic maple syrups.
The consensus — based on focus group taste testing by me and the granddaughters — was that one Vermont syrup and one Minnesota maple syrup were both superior to my original Canadian favorite.
Both of the domestic maple syrups were less expensive and one provided free shipping.
These tariffs are not a prison sentence. The consumer gets to determine what, if anything, they absorb of any tariffs.
I could have used Canadian lumber, lumber futures, sawmill capacity utilization rates but I figured you’d be more likely to understand pancakes and maple syrup.
Probably because they don’t have access to Canadian lumber which I am told is better than American lumber? I don’t know.
But you are right, my smarmy comment deserved yours.
At the risk of ‘singing into the wind’, your anecdote points to the general problem of reduced choice. Prior to tariffs, you maybe did not know about Vermont or Minnesotan maple syrup and those products are certainly very good. But now you get to choose from 2 locales rather than 3. Are you worse off? Probably not because the joy of giving pancakes to 3 granddaughters far outweighs what exactly is the syrup involved.
It’s the same in here in Canada. After Trump insulted us, we did what any good American would do, we boycotted American goods. Result: California wine sales have fallen off a cliff, Kentucky bourbon likewise, and American tourism has tanked. This has meant less choice for Canadians but Portuguese or Chilean wine is excellent, as is Canadian, Irish and Scottish whiskey, and frankly going to Europe or South America or Asia has been a truly broadening experience for many Canadians. Nevertheless, out choices are fewer.
You may not believe this but a Canadian friend of friend was driving to Seattle from Vancouver to catch a plane for a Hawaian vacation. The border guard asked him what he thought of Trump. The idiot reponded honestly and got a stamp that said “Not allowed in the USA for 4 years”. End of vacation. That is loss of choice.
If I understand economics correctly, more choice enriches product quality and reduces prices. So the tariffs, and the malignant force behind them (the ‘othering’ of foreign countries) are a bad thing economically. You don’t need to believe me, listen to Ronald Reagan in the advert sponsered by the Ontario government this weekend. Everything said in the advert was said by Reagan.
Maple syrup is a pretty simple example, and yet....that Vermont company is paying tariffs on Canadian hydropower for their boilers and the Minnesota firm pays tariffs on imported glass and all those costs are *eventually* going to get passed to the consumer. Modern supply chains are so complex that harnessing tariff arbitrage is going to be a little trickier than just shopping around. An illusion of power, like claiming you're not a slave to the IRS because you are in charge of reporting your income.
So far, US corporate profits (see this season's batch of earnings reports) are at all-time record highs, as is the S&P 500, and the stock markets of Japan, South Korea, Taiwan, Canada, Mexico, Europe (SXXP), Indonesia, and even Israel.
The MSCI WORLD IDX (a global equities index) struck an all-time high last week, and is up 27.7% in last 52 weeks.
So why would a global equities index rise 27.7% in last 52 weeks, and strike all-time record high?
Actually, I am wondering myself, but I think we can say, "Tariffs, schmariffs."
Tariffs are one of the hoariest totems in the Hall of Orthodox Macroeconomics, and in a perfect world, a bad idea.
A much, much bigger hit to US living standards is found in housing shortages, and the ridiculous cost of college education. Something tells me healthcare eats up too much money too, but there is only so much I can be outraged about at once.
Property zoning is probably the worst thing going in the US, followed by government involvement in healthcare.
Tariffs...relatively unimportant, and the effects will be mitigated in time.
In addition, there are huge national security issues attendant in tariffs.
Sadly, what the war in Ukraine shows, and not in theory but in fact, is that liberal democracies need the ability to produce vast amounts of war material, and to radically innovate, simultaneously.
In addition, a chilling idea is that what "free trade" has done in the last 20 years is provide resources and ability to "arm up" to the most illiberal regimes on the planet, in Beijing, Moscow and Tehran. Ugly, but true?
There are surely unpopular topics in econ departments across America.
The reality is tariffs hurt most those who can afford it most. Trump’s base is most impacted by oil & gas and USA grown food. Italian wine? Buy California. VW? Buy Tesla. Ferrari? Pay the tariff. Hermes? Pay the tariff.
I wonder if this applies to energy? It seems as though whenever there is a supply chain event, prices go up right away for oil products. Is energy not subject to sticky prices theory?
Intersting that he does no want to sound critical of the President, wans to hide the effect from consumers as long a possible (unil after the elections?)
Thanks for sharing. Something similar was included with the Flash US PMI increase this past week:
The survey data are consistent with the
economy expanding at a 2.5% annualized rate in October after a similar rise was signalled for the third quarter.
“However, business confidence in the outlook for the coming year has deteriorated further, and is at one of the
lowest levels seen over the past three years as companies worry about the impact of policies, most notably tariffs.
Companies are also concerned over disappointing export sales, especially in manufacturing, and factories are
seeing an unprecedented rise in unsold stock. Having bought excess inputs earlier in the year to front-run tariffs, producers are making more goods to use up these inputs but are often struggling to sell the end product to customers.
“Hence, although input costs continued to rise sharply again in October, principally reflecting the pass-through
of tariffs, average selling price inflation has cooled to the lowest since April as firms compete on price to win sales.”
Caring about whether your inventory item cost $1 or $1.50 as an input to the price you can charge is a kind of sunk cost fallacy. The widgets before and after the tariff impact remain worth exactly whatever the customers are willing to pay, which in turn depends on what alternatives customers have and what price changes your rivals will implement.
I think of tariffs as a sales tax levied on a subset of goods from a subset of places. Market distorting, sure, A Bad Thing, OK, but over time not worse for either consumers in general or producers in general than a sales tax on all stuff from anywhere.
And say the tariffs raise $xB, and sales taxes were cut by $xB. Revenue neutral for govt, cost neutral for consumers.
Prominent members of the administration and Democrats in Congress have also been wailing about tariff-induced price-raising collusion or even "greedflation." So, many larger businesses are probably pondering the political blowback that might come from booking near-term windfall profits by pricing at opportunity cost.
A very thought provoking article. Thank-you for sharing it. I am watching the ranchers here in southern Arizona explain their issues with the tariffs and President's Trump desire to but beef from Argentina. Also, my farmer friends in the Midwest are taking a beating over tariffs with China. (China is not buying American soybeans) Just because prices haven't raised yet, doesn't mean that they won't. (Also, thank you for allowing me to comment many authors on substack hide comments behind their paywall. Just my humble opinion, hope I haven't upset anyone. )
Very useful real world perspective…afraid that Nial is ensconced in Ivory Tower and blindly relies on macro-data to construct his world view.
My company costed our inventory at replacement cost and would charge prices on a margin computation upon notification in advance of the actual cost change taking effect for a nice arbitrage. My guess is your CEOs company is doing the same thing, whether they know it (or will admit it) or not.
I think everyone down here in the trenches understands that tariffs will make foreign goods more expensive. I buy a fair amount of hobbyist-type robotics and micro-controllers to feed my electronics addiction and benefited tremendously from the de minimis provisions. I suspect those prices will go up significantly next year and I may have to go into an addiction treatment program. However, I don't think economists like yourself have even begun to factor in just how much pain the ordinary American is willing to endure to level the trade playing field with our foreign markets and rehome a lot of the industry that went away when everything got outsourced to 'everywhere but here'. We can do with a bit less, but just the thought of shafting the uni-party elites who have been selling our country to the lowest bidder for decades would offset a lot of the pain
Well said.
I think you are right that about 50% of Americans will not care that there is a one-time jump in retail prices --- willing to take the pain, as you say. But good economists always ask, "and then what"? Quick on the heels of the entirely noticeable uptick in retail prices will be the midterm elections.
Willingness to pay is not the same thing as ability to pay. How long will it be before rising prices convert to "vote the scoundrels out"? Many of the same 50% of Americans who are willing to tighten their belts to re-shore retail goods are people who cannot afford another 10%-15% jump in retail prices.
Oh, by the way. Where is the money from the jump in prices going? It's going into the coffers of the U.S. Treasury. What will the government do with that money? Anything and everything except what the payers of the tax would have done with it.
One of the things you miss completely is the reality the consumer controls the price they pay and whether they absorb any of the tariff.
Allow me to use a real world, personal example: I love Canadian maple syrup on my pancakes. It is decadent.
I have 3 young granddaughters who are smitten w my pancakes and my favorite Canadian made syrup.
Alas, the price of my favorite Canadian maple syrup — delicious elixir — increased rather dramatically.
Confronting that painful economic reality, I researched domestic maple syrups.
The consensus — based on focus group taste testing by me and the granddaughters — was that one Vermont syrup and one Minnesota maple syrup were both superior to my original Canadian favorite.
Both of the domestic maple syrups were less expensive and one provided free shipping.
These tariffs are not a prison sentence. The consumer gets to determine what, if anything, they absorb of any tariffs.
A lovely anectode. The plural of ‘anecdote’ is not ‘data’ said the economistto the layman. (Sorry)
Wow never heard that before.
I could have used Canadian lumber, lumber futures, sawmill capacity utilization rates but I figured you’d be more likely to understand pancakes and maple syrup.
Why do economists live in such ratty houses?
Probably because they don’t have access to Canadian lumber which I am told is better than American lumber? I don’t know.
But you are right, my smarmy comment deserved yours.
At the risk of ‘singing into the wind’, your anecdote points to the general problem of reduced choice. Prior to tariffs, you maybe did not know about Vermont or Minnesotan maple syrup and those products are certainly very good. But now you get to choose from 2 locales rather than 3. Are you worse off? Probably not because the joy of giving pancakes to 3 granddaughters far outweighs what exactly is the syrup involved.
It’s the same in here in Canada. After Trump insulted us, we did what any good American would do, we boycotted American goods. Result: California wine sales have fallen off a cliff, Kentucky bourbon likewise, and American tourism has tanked. This has meant less choice for Canadians but Portuguese or Chilean wine is excellent, as is Canadian, Irish and Scottish whiskey, and frankly going to Europe or South America or Asia has been a truly broadening experience for many Canadians. Nevertheless, out choices are fewer.
You may not believe this but a Canadian friend of friend was driving to Seattle from Vancouver to catch a plane for a Hawaian vacation. The border guard asked him what he thought of Trump. The idiot reponded honestly and got a stamp that said “Not allowed in the USA for 4 years”. End of vacation. That is loss of choice.
If I understand economics correctly, more choice enriches product quality and reduces prices. So the tariffs, and the malignant force behind them (the ‘othering’ of foreign countries) are a bad thing economically. You don’t need to believe me, listen to Ronald Reagan in the advert sponsered by the Ontario government this weekend. Everything said in the advert was said by Reagan.
Maple syrup is a pretty simple example, and yet....that Vermont company is paying tariffs on Canadian hydropower for their boilers and the Minnesota firm pays tariffs on imported glass and all those costs are *eventually* going to get passed to the consumer. Modern supply chains are so complex that harnessing tariff arbitrage is going to be a little trickier than just shopping around. An illusion of power, like claiming you're not a slave to the IRS because you are in charge of reporting your income.
So far, US corporate profits (see this season's batch of earnings reports) are at all-time record highs, as is the S&P 500, and the stock markets of Japan, South Korea, Taiwan, Canada, Mexico, Europe (SXXP), Indonesia, and even Israel.
The MSCI WORLD IDX (a global equities index) struck an all-time high last week, and is up 27.7% in last 52 weeks.
So why would a global equities index rise 27.7% in last 52 weeks, and strike all-time record high?
Actually, I am wondering myself, but I think we can say, "Tariffs, schmariffs."
Tariffs are one of the hoariest totems in the Hall of Orthodox Macroeconomics, and in a perfect world, a bad idea.
A much, much bigger hit to US living standards is found in housing shortages, and the ridiculous cost of college education. Something tells me healthcare eats up too much money too, but there is only so much I can be outraged about at once.
Government is reportedly the largest purchaser of health care (I guess because of Medicare?) and you know how frugal the government is.
Property zoning is probably the worst thing going in the US, followed by government involvement in healthcare.
Tariffs...relatively unimportant, and the effects will be mitigated in time.
In addition, there are huge national security issues attendant in tariffs.
Sadly, what the war in Ukraine shows, and not in theory but in fact, is that liberal democracies need the ability to produce vast amounts of war material, and to radically innovate, simultaneously.
In addition, a chilling idea is that what "free trade" has done in the last 20 years is provide resources and ability to "arm up" to the most illiberal regimes on the planet, in Beijing, Moscow and Tehran. Ugly, but true?
There are surely unpopular topics in econ departments across America.
The reality is tariffs hurt most those who can afford it most. Trump’s base is most impacted by oil & gas and USA grown food. Italian wine? Buy California. VW? Buy Tesla. Ferrari? Pay the tariff. Hermes? Pay the tariff.
I think otherwise. Check out the country of origin for what you buy at Walmart.
I wonder if this applies to energy? It seems as though whenever there is a supply chain event, prices go up right away for oil products. Is energy not subject to sticky prices theory?
Arsenal, the English soccer team, lets you shop tariff free.
https://arsenaldirect.arsenal.com/?utm_source=arsenaldotcom&utm_medium=OnlineShoppingButton&utm_campaign=ArsenalOnlineShopping
I assume they are paying the tariff.
Intersting that he does no want to sound critical of the President, wans to hide the effect from consumers as long a possible (unil after the elections?)
Thanks for sharing. Something similar was included with the Flash US PMI increase this past week:
The survey data are consistent with the
economy expanding at a 2.5% annualized rate in October after a similar rise was signalled for the third quarter.
“However, business confidence in the outlook for the coming year has deteriorated further, and is at one of the
lowest levels seen over the past three years as companies worry about the impact of policies, most notably tariffs.
Companies are also concerned over disappointing export sales, especially in manufacturing, and factories are
seeing an unprecedented rise in unsold stock. Having bought excess inputs earlier in the year to front-run tariffs, producers are making more goods to use up these inputs but are often struggling to sell the end product to customers.
“Hence, although input costs continued to rise sharply again in October, principally reflecting the pass-through
of tariffs, average selling price inflation has cooled to the lowest since April as firms compete on price to win sales.”
Caring about whether your inventory item cost $1 or $1.50 as an input to the price you can charge is a kind of sunk cost fallacy. The widgets before and after the tariff impact remain worth exactly whatever the customers are willing to pay, which in turn depends on what alternatives customers have and what price changes your rivals will implement.
I think of tariffs as a sales tax levied on a subset of goods from a subset of places. Market distorting, sure, A Bad Thing, OK, but over time not worse for either consumers in general or producers in general than a sales tax on all stuff from anywhere.
And say the tariffs raise $xB, and sales taxes were cut by $xB. Revenue neutral for govt, cost neutral for consumers.