I was curious about the impact of Trump's tariffs so I put together some information that is related to this thread about price hikes and tariffs.
The profit margin you make on a product is an important metric. WalMart's profit margin is 2.85%. If a product goes from 10.00 to 11.00 because of a tariff they not only have to raise the price to 1.00 but they need the 2.85 cents added on, plus the taxes they have to pay on the additional income. Of course, few companies have that low of profit margin.
The problem I see with tariffs is that when they are declared illegal or reduced by the next President, which seems rather certain, there won't be much of a price decline.
The good news on tariffs is that we might think that a ten percent tariff is exactly ten percent on the good. No it is 10% of the value of the import. So the tariff is on the wholesale price of the good and only the part that actually comes from the imported nation. Also, if the product being imported has any U.S. content (Parts or value added that are included in the import that are from the USA) those parts are not part of the tariff either.
A sort of "nasty" (at least to me) example would be salmon. It is not uncommon for USA, even Alaska wild salmon to be shipped to China for processing into a frozen food and then shipped back to America. The salmon itself would be exempt from tariffs, but the processing cost which is the value added in China would be subject to a tariff. If that were ten percent of the total cost, with a 50% tariff the .10 x .50 would equal a 5% cost increase in salmon. The freight and shipping cost is also part of the tariff though as well as the additional need to maintain a profit margin.
It was absurd that Trump would suggest to Walmart that they better not raise prices. With this small 2.85% profit margin they would soon go bankrupt if they did not hike prices. Many of the items will not be like China processed, USA salmon. Instead they may be 100% Chinese made and subject to tariffs on the entire wholesale cost.
An example would be an electric can opener costing 20.00. If the wholesale price to walmart was $10.00, then the 50% tariff would be $5.00, a 25% increase in total price. In this example you might think that walmart is making a huge profit margin, but the reason for 2.85% actual profit margin is that Walmart pays quite a bit in utilities, building costs, labor, warehousing, taxes etc.
Great companies like Walmart have sophisticated supply chains. They generally have vendor contracts for units and Walmart generally must pay the tariff on the wholesale cost. As possible, they are shifting to vendors out of China. Trump and the courts instability on exact tariff rates though make their process difficult. The top range for toys from China is already starting to show up and some have seen a price hike of 45%. Estimates though for total tariff affects on inflation seem far more subdued. "For example, if an across-the-board 25% tariff is fully passed through to finished goods, near-term price increases are estimated to be about 9.5% for investment goods and 2.2% for consumption goods."
The Effects of Tariffs on Inflation and Production Costs - San Francisco Fed
Personally, I think those numbers are too low for consumption goods. As prices rise we will enter a new cycle of wage demands and price hikes in everything else as the Federal Reserve suggests in the opening post. The exception might be housing prices could subside and even decline. Also, the threat of demand pullbacks due to higher prices will effect even local government sales tax revenues and if consumers really react negatively to tariffs, economic contraction.
