You cannot turn on the TV these days without hearing the liberal media (and some conservative) hand wringing over the incoming president's comments about global trade. There are absolutely ZERO in the media that know anything that will happen but that doesn't stop them from talking about how Trumps polies may end the world,,,or at best, end free trade.
But what are tariffs? And why are we hearing that they are so bad? I thought an overview of what a tariff is was worth exploring and I also think it's important to put into REAL context what may happen. Remember, this isn't Trumps first rodeo, and he instituted tariffs last go around ...tariffs that the Biden administration did not cancel...
So a little back Gound:
The Impact of Tariffs on the U.S. Economy: A Double-Edged Sword
Tariffs, or taxes on imports, are a key tool in international trade policy. Governments impose them to protect domestic industries, influence trade balances, and sometimes as a retaliatory measure. In recent years, the United States has increasingly used tariffs as a way to address trade imbalances, protect local jobs, and assert economic and geopolitical power. However, while tariffs can offer short-term benefits for certain sectors, their long-term effects on the U.S. economy are far more complex, with both positive and negative consequences.
1. Positive Impacts of Tariffs on the U.S. Economy
A. Protection of Domestic Industries
One of the most commonly cited reasons for imposing tariffs is the protection of domestic industries. When the U.S. government levies tariffs on foreign products, it raises the cost of those imported goods, making them less competitive in the American market. This gives American manufacturers a pricing advantage, potentially helping them to grow and preserve jobs in industries such as steel, automotive, and textiles.
For example, in 2018, the U.S. imposed tariffs on steel and aluminum imports under the premise of safeguarding U.S. national security interests and reviving the struggling domestic steel industry. This move aimed to prevent foreign competition from flooding the market and undercutting American producers.
B. Incentive to Create Domestic Jobs
Tariffs can also stimulate domestic employment in protected industries. As foreign competition becomes less viable due to increased costs, domestic manufacturers may increase their output, leading to job creation. Some argue that tariffs lead to the reshoring of manufacturing jobs that had previously been outsourced to countries with lower labor costs, such as China or Mexico. For example, the tariffs on Chinese products in recent years were intended, in part, to encourage companies to move some of their production back to the U.S. These early Trump tariffs were kept in place during the last four years by the Biden administration and do not seem to have hurt the US economy...quite the contrary. Aside from the revenues quite a few companies have brought manufacturing back home. (more on this in the conclusion)
C. Revenue Generation for the Government
Tariffs can also be a revenue source for the U.S. government. When foreign goods are taxed at the border, the U.S. Treasury collects those funds, which can be used for government programs or deficit reduction. In the case of recent tariffs, the U.S. government has collected billions in tariff revenues, which, in theory, could support investments in infrastructure, education, and innovation.
2. Negative Impacts of Tariffs on the U.S. Economy
Despite these potential advantages, tariffs often have several unintended and negative effects on the broader economy, particularly when they are imposed on a large scale or for an extended period.
A. Higher Prices for Consumers
One of the most immediate consequences of tariffs is the increase in prices for consumers. When the cost of importing goods rises due to tariffs, businesses pass these increased costs onto consumers. This price inflation can be particularly noticeable in industries reliant on imports for raw materials or components, such as electronics, automobiles, and household goods. The U.S. Department of Commerce's 2019 report on tariffs, for example, found that U.S. consumers paid an estimated $38 billion more for products in 2018 due to tariffs, particularly on Chinese imports. But to put things in perspective, In 2018, U.S. imports from China totaled $539.5 billion, while U.S. exports to China totaled $120.3 billion. The trade deficit was $419.2 billion12.
B. Disruption to Supply Chains
In today's globalized economy, supply chains are highly interconnected, and many U.S. companies rely on imported raw materials, intermediate goods, and finished products to maintain efficient production processes. Imposing tariffs disrupts these international supply chains by increasing the cost of raw materials or components that are difficult to source domestically. For instance, tariffs on Chinese parts have raised the costs for U.S. companies in industries such as electronics, automobiles, and construction equipment, making them less competitive in the global marketplace.
C. Retaliation and Trade Wars
When the U.S. imposes tariffs, it often triggers retaliatory tariffs from trading partners. This tit-for-tat escalation can lead to a full-scale trade war, where each country raises tariffs on the other’s goods. Such conflicts can severely disrupt global trade, damaging both the U.S. and its trading partners. The U.S.-China trade war, which began in 2018, is a prime example of this dynamic. In response to U.S. tariffs, China imposed tariffs on American goods such as soybeans, cars, and electronics. These retaliatory measures hurt U.S. exporters, particularly those in agriculture and manufacturing.
D. Impact on International Relations
Tariffs can also strain diplomatic and economic relationships between the U.S. and other countries. When tariffs are imposed unilaterally, as was the case with the Trump administration’s tariffs on steel and aluminum, it can damage trust and cooperation between the U.S. and its allies. This could also weaken multilateral institutions like the World Trade Organization (WTO), which has traditionally worked to reduce trade barriers and resolve disputes. The imposition of tariffs may result in long-term diplomatic fallout that can extend beyond economic matters.
E. Negative Effect on Global Economic Growth
Tariffs and trade wars can also have a negative effect on global economic growth. As tariffs increase the cost of trade between countries, they reduce the overall volume of global trade. According to the International Monetary Fund (IMF), the global economy’s output can slow down in the face of widespread tariff increases, which can also dampen U.S. economic growth. A slowdown in global trade may ultimately harm U.S. businesses that rely on exports to fuel their growth.
3. The Balance of Tariff Policy: Risks and Rewards
While tariffs offer certain protections and incentives for the U.S. economy, they must be carefully considered. Policymakers need to weigh the potential short-term benefits, such as protecting jobs in certain sectors, against the longer-term costs, including higher prices for consumers and disruptions to supply chains. In particular, tariffs should be used strategically to avoid retaliation and trade wars that can lead to broader economic damage.
To mitigate these risks, some experts argue that the U.S. should focus on more targeted tariff policies that protect vital sectors without imposing blanket tariffs on large swaths of imports. Additionally, pursuing trade agreements with other countries that lower tariffs can help reduce the cost burden on consumers and businesses.
Conclusion
In summary, tariffs are a powerful tool of trade policy that can have both positive and negative impacts on the U.S. economy. While they offer protection for domestic industries and can generate revenue for the government, they also carry the risk of increased prices for consumers, supply chain disruptions, and retaliation from other nations. The effectiveness of tariffs depends on how they are implemented and whether the benefits to specific industries outweigh the broader economic costs. For the U.S. to successfully navigate the complexities of tariff policy, it will need to balance protectionist goals with the demands of global trade and cooperation. It's worth noting that when we are hearing about Trumps tariff polices that he wrote a book called the 'Art of the Deal'. Maybe before all the handwringing the pundits should understand the balance of a negotiation...and that the US is the biggest market in the world. Meaning other countries need us more than we need them...
Oh, and perhaps it's also important to point out (thanks to Samuel Rines) that US companies have been preparing for this for quite some time. Below are comments from quarterly earnings calls from several US publicly traded companies. Strange how they are less concerned than the folks on MSNBC. What does all of this mean? Maybe the tariff threats and rhetoric are slightly overblown. Maybe, as always, the folks on MSNBC should take an econ class before speaking? Maybe for Rachel Madow she should have learned that lying to her viewership lowers her overall ratings? Certainly, tariffs are not great for businesses. But it is not as though companies are being caught off guard. They have been in this situation before, and many learned their lessons and adapted. That should not be underestimated. The idea that inflation could reaccelerate is a reasonable one, but it is not straightforward either (as seen with the Ollie's Bargain Bin statements). Excuseflation—the idea that companies would use tariffs as an excuse to raise prices—may well occur in certain areas. But it may not be across the board. Not to mention, Middle America might not feel the tariff effects as much as anticipated either.
Simply, the potential for tariffs to be disruptive is something to pay close attention to over the coming months. But companies will be affected by tariffs in different ways. For some, it may even be an opportunity.
American Eagle
Katie Delahunt
This is Katie Delahunt on for Alex Straton. I just want to ask, how are you thinking about the impact of the new administration particularly on tariffs. Any color you could give on kind of your manufacturing exposure there would be really helpful?
Jay L. Schottenstein
Okay. This is Jay. We're very flexible in our operations. We have the ability like to source anywhere. Just to remind everybody, we were around in 2016 through 2020. So, this is nothing new to us. We've been living with tariffs and change in tariff policy in 2020, it's still going on, and we have that flexibility. And nobody knows for sure exactly what's going to happen. So, we are flexible and we are lean that way.
American Eagle may have stated it best. This is not the first go around. Companies navigated the first bout of tariffs and good ones have a game plan. And it is not as though the sourcing headwinds waned in the intervening years. The first Trump Administration was the initial catalyst for a rethinking of supply chains, and the Covid related interruptions accentuated it. In essence, the past several years have hardened parts of the U.S. economy to tariffs.
Lennox International
What we do take comfort in the fact that for China tariffs, if there are China tariffs that go up, we are very well positioned because when the first-time tariffs went into effect and during the COVID supply chain, we have reduced our dependency on China significantly. And the switch we recently did to move to Samsung products for mini splits and VRF that even further reduced our China exposure. From that perspective, low China exposure and Mexico exposure kind of at par with some of the other industry players.2
Newell Brands
Relative to China and the sourced part of our business, which is a little bit less than half of our business, we used to, 3 or 4 years ago, have about 35% of our products sourced from China for the U.S. That number today is down to 15%. By the end of next year, it will be 10% or lower. And the primary product that we're making in China, of that 10%, is baby products, car seats, the Graco business, which are fully exempt from the 301 tariffs. We were able to get that exemption the last time the tariffs were implemented in China.
And so, hard to predict the outcome, but we feel like we're well positioned to go and make that pitch again to exempt the baby business from tariffs. We'll see how—whether we're successful or not.3
Two very different companies made rather similar statements. Lennox is a maker of air conditioners and the like. And they are almost excited about the potential for tariffs. Why? Because they took the opportunity to rework their supply chain and reduced their exposure to China. Newell Brands said something similar. Not only is their reliance on China significantly lower than previously (from 35% to 15%). But there is also the assumption that baby products will be exempt from the 301 tariffs.
Lands' End
The fact of the strength of your margins? How much is internal versus external? And lastly, China, any percentage of goods from China and thoughts on tariff impact and what it may mean for pricing for you?
Andrew J. McLean
Great. I'll kick off with China, Dana. We've worked to put some real agility into our supply chain over the last couple of years, and China now accounts for less than 6% of our open to buy.4
Academy Sports and Outdoors
Over the last several years, as part of our normal course of business, we have taken proactive steps diversifying our sourcing base to reduce our direct import exposure from a single country, which we believe best positions our business in 2025 and beyond.
First, sales of our private brands represent roughly 21% of our total business. As I mentioned earlier, we have steadily been diversifying our supplier base over the past several years and have moved the percentage of goods we directly source from out of China from over 70% in 2019 to roughly 50% today, and we have an exposure to Mexico or Canada. This translates to approximately 10% of exposure to potential elevated tariffs on which we are the importer of record. We will continue this diversification strategy moving forward and continue to look for ways to further mitigate any risk.5
Ollie's Bargain Bin
Robert F. Helm
We generally thrive on disruption and the tariffs are one of those disruptive events. We think that if anything, the tariffs could create an additional closeout opportunity where some other traditional retailers may be priced out of goods because of the incremental tariffs that we may be able to get that—get those products at a bargain and share those bargains with our customers. So being a price follower, it positions us well to navigate through the tariff situation.6
When it comes to the question of who is most affected by tariffs, the first companies that come to mind are retailers. This makes sense given the historic buying patterns and the "made in China" tags of the past. The only issue being the "historic" part of that statement. As it turns out, the world has changed a bit since 2016.
Lands' End—a clothing retailer—only has a 6% exposure to direct China purchases. When it comes to sporting goods, the news is less positive. But still trending in the correct direction. For Academy Sports and Outdoors, the China sourcing has declined from 70% in 2019 to 50% today. The process of diversifying their suppliers continues. On the discount retail front, there is an odd amount of excitement about the prospect for tariffs. Ollie's Bargain Bin sees the disruptions as an opportunity to buy more closeouts at bargain prices and pass the bargains on to consumers. If there is ever something to challenge the narrative of "the consumer will feel the pain," it is how companies have reacted over the past several years to challenges and expect to react this time around.
Tractor Supply
In addition to developing great private brands, we've also been building a very strong global sourcing capability. We all know that potential tariff exposure is on all of our minds. As a reminder, direct imports currently represent only around 10% to 15% of our total sales. And since 301 tariffs were imposed, our dedicated global sourcing team has worked hard to diversify our global supply around the globe.
We've cut our exposure to Chinese direct imports by nearly 1/3 since that time, with a clear roadmap for further diversification. While all retailers will be impacted if new tariffs are imposed, we have a track record for success, and we've successfully navigated tariffs in the past. And I have confidence that we have a game plan to successfully navigate them in the future.
Casey's General Store
Darren M. Rebelez
With respect to the consumer, we're—directionally, the consumer is hanging in there about the same as what we would have talked about last quarter. We're still seeing a little bit of softness on that lower-income consumer. But again, we don't have a disproportionate exposure to that consumer for the balance of the consumers, which are about 3/4 of them. They're continuing to shop. They're continuing to visit the store at the same frequency, continuing to buy as normal. So, I think getting back to Steve's point, we've—this quarter, we're at the midpoint of the guidance this past month in November at the midpoint. We think that 3 to 5 is the appropriate range that ultimately, we will land on for the year.8
And then there is the ongoing resilience of Middle America. There are few companies that target the Midwest and/or rural areas. Tractor Supply and Casey's General Store are two of them. Tractor Supply only has 10%–15% sales exposure to imported products—not products that might face tariffs—products that are imported. For a retailer, that is a rather small figure. There was not a single mention of tariffs on the Casey's General Store earnings call. That says something on its own, but it was the statements made around the health of the consumer that jumped out. There has been little to no change. Lower income under pressure, everyone else is fine.
1 "Excuseflation" is a term used to describe when companies raise prices by taking advantage of one-off disruptions.
2 American Eagle earnings call, 12/10/24 (emphasis added).
3 Lennox International, as of 12/10/24 (emphasis added).
4 Newell Brands, as of 12/10/24 (emphasis added).
5 Lands' End, as of 12/10/24 (emphasis added).
6 Academy Sports and Outdoors, as of 12/10/24 (emphasis added).
7 Ollie's Bargain Bin, as of 12/10/24 (emphasis added).
8 Tractor Supply, as of 12/10/24 (emphasis added).
9 Casey's General Store, as of 12/10/24 (emphasis added).
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