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US Tariffs - Blunder or Brilliance?

US President Donald Trump has announced broad, sweeping tariffs on imports into the USA.

In effect, all US residents will now be paying more, sometimes a lot more, for goods that enter the country from outside its borders.

New Zealand is lucky enough to be on the minimum tariff level of 10 percent but many other countries have been hit much harder, 54 percent in the case of China.

It would appear that the likes of Temu and AliExpress will find the going tough in light of the fact that the effective cost of their wares has now been hiked by such a significant amount in their single largest market.

Trump has taken the rather simplistic attitude that tariffs will make US businesses more competitive, boost their sales and thus boost the national economy.

I'm not so sure though.

Let me just say for the record, I'm not an economist so my opinion likely counts for very little.

However, I do know how capitalism works and I also know how astute businesses respond to opportunities such as those created by Trump's tariffs.

It can't be denied that tariffs will push up prices in the USA. Most Chinese-made goods will cost significantly more and, according to Trump's somewhat naive predictions, this will result in US manufacturers stepping in and offering domestically produced equivalents at lower prices.

Sorry, that isn't how capitalism works.

Retail pricing strategy has changed over the decades. There was a time when the end-user price of a product was based on a "cost-plus" calculation. The actual cost of manufacturing had a profit margin added to it and the result was the retail ticket price.

That simple calculation has increasingly been abandoned for a "what the market will bear" approach. One only has to try buying a latest-generation graphics card to see that in action. If people are prepared to pay over the odds for a product then manufacturers and retailers will be more than happy to charge a premium far beyond that which the cost-plus method would produce.

With this in mind, if the price of Chinese-made products is going to jump by over 50 percent then you can be sure that any US-made product will only be priced so as to be no less than that Sino-sourced item.

Net result... price increases across the board and, as we all know, increased prices produces inflationary pressure that in turn leads to increased wages. Chances are that wages will not keep pace with the price spiral so instead of Americans becoming rich again, they will in fact become poorer -- except perhaps for the likes of Jeff Bezos.

Trump's tariffs amount to increased taxes for most Americans -- is that what they really want?

However, on the flip-side, these tariffs are not a whole lot different to the imposition of GST or VAT on a nation. These sort of taxes cause a sudden and significant increase in prices but economies such as NZ, Australia and others seem to have weathered the effects of these tax-based price-hikes very well -- although there was a significant hike in inflation and interest rates during the period that followed.

The real risk that the USA faces right now is the likelihood that other nations will forge new trade deals and agreements that may effectively create a significant barrier to US exports. BRICS is just the start of this trend and I can imagine many more such trading groups will appear, none of them including the USA.

Although the USA is a huge market, it's not bigger than the rest of the world combined and becoming an isolationist economy carries as many risks as it does rewards -- as the USA may soon discover to its cost.

Meanwhile, New Zealand is well positioned to weather the storm. As a result of being hit with one of the lowest tariff rates announced by Trump, our exports to the USA will be more competitive than those of many other countries against which we compete in that marketplace.

Don't we live in interesting times?

Carpe Diem folks!

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