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The topic of the month, or more, is tariffs. Endless debates about . . . everything regarding tariffs except the essential. We never see explained what exactly a tariff is, how it operates, what its effects are.
We all know that a tariff is a government’s charge on somebody or something, but people seem to think in collective terms. When you buy a Swiss Lindt chocolate bar, is “Switzerland” being charged tax? No, the American buyers of the product of the Lindt & Sprungli Group are charged the tax. People think that Lindt and Sprungli can just lower their price to make up for it. This is wrong.
Consider: what is their profit rate? What does our tariff do to their profit rate? What is the average rate of profit in the world economy?
In the Left’s cartoon-thinking, the average rate of profit is over 200% and the added cost of a tariff would bring that down to 195%. In the MAGA version, the average rate of profit is 10% and the added cost of a tariff, if the foreign companies were to absorb it, would bring that down to 0%, to stop foreign firms from selling here.
What are the actual facts?
If internet data can be trusted, the average rate of profit on invested capital is between 7% and 9%. Lindt & Sprungli Group happened to do well last year, achieving 12% on invested capital. Trump originally threatened Switzerland with a 31% tariff, now it’s down to 10%. That would leave 2%, in an unusually good year, for Lindt & Sprungli Group. So of course they are going to have to pass most of that on to consumers.
Trump doesn’t care. In fact, he wants people to stop buying internationally, and instead buy American. Let them eat Hershey’s.
But has anyone pointed out that the current array of imports, by consumers and businesses, represents what Americans want? Supposedly, we should “Buy American.” But “we” don’t want to. So why should we? Because it will make America great again if those unwanted factories in the rust-belt states start up again.
At least when your mother tells you that you must eat your vegetables, even though you want to eat ice-cream, it’s because she judges vegetables to be better for your health. But now you’re grown up. Now you’re considering which car to buy. There’s just no reason why you should buy Ford or GM cars instead of the Toyota or Kia that you would choose, sans tariffs.
Journalists are not connecting the closed auto plants in Michigan with their cause: the buying choices of Americans. It’s presented as if some alien force—maybe billionaires, maybe “the system”—is making car factories shut down. But the alien force is us! It’s we who are shutting down those plants. Lots of us don’t want the cars they make.
Here’s what Marty MAGA is saying without saying it:
Marty: “Look, I know me. If someone doesn’t stop me, I’ll buy a Kia truck when I should buy a Ford F-150. So I’m voting for a president who’ll make the Kia truck too expensive for me. That way, I’ll be comforted by the lights going on in those Michigan factories, even though I live in Driftwood, Texas, and I’ll never actually see those plants. We can make America great again by stopping Americans like me from getting what we want.”
So, the big picture, which you would never get from the media, is that we have elected someone to stop us from buying the cars and chocolate and . . . everything that we prefer to American products.
/sb
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Re: Harry Binswanger’s post 104615 of 4/10/25
Yes, when the government steps into the middle of a transaction it makes sure that neither party gets what it wants. Lindt doesn’t get a sale and the American consumer doesn’t get the chocolate it wants.
But based on my evolving understanding, I think you are mistaken that Lindt pays the tax. I think that would please Trump supporters that the foreigner pays. When the goods arrive in an American port, the Customs Agent collects the tax from the importer, i.e., from the company that ordered the chocolate or the car from the foreign producer. A tariff is not a tax on foreigners. It is a tax on us.
The importer then has to raise prices to cover its increased costs. Sometimes it will spread the pain around and increase the price of domestic cars as well as the foreign cars but the net effect is the same. We are the ones who pay more because of the tariff tax.
/sb
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Re: Harry Binswanger’s post 104615 of 4/10/25
If internet data can be trusted, the average rate of profit on invested capital is between 7% and 9%. Lindt & Sprungli Group happened to do well last year, achieving 12% on invested capital. Trump originally threatened Switzerland with a 31% tariff, now it’s down to 10%. That would leave 2%, in an unusually good year, for Lindt & Sprungli Group.
This seems to confuse the return on capital (presumably, return on equity, but perhaps return on assets) with the net profit margin. The former is the amount of profit (over a period) divided by capital employed (value of property, inventory, etc., usually measured at the beginning of the period). The latter is the amount of profit divided by sales (in a given period).
If the net profit margin is 12%, then adding 10% to the cost will indeed result in a net profit margin of 2% (if the selling price remains the same).
If the return on capital is 12%, then adding 10% to the cost will. . . lower the return on capital, but it’s not obvious by how much.
For example, a vending machine might have a profit margin of “only” 3%. That is, every time it sells a $1 chocolate bar, the owner makes $0.03 after all expenses. But maybe it sells 10,000 chocolate bars per year, for total profit of $300. If the vending machine costs $2,000 and it takes $500 to fully stock the inventory, then the capital employed is $2,500, resulting in a 12% return on capital (assume that the machine stays fully stocked over the year, i.e., the owner uses the bulk of the sales to repurchase inventory rather than decapitalizing the machine).
If that vending machine had to increase costs by 10%, then its profit margin would be now -7%, i.e. it loses money with each sale. Return on capital doesn’t go down to 2%, but is actually (very) negative. The owner will either have to keep injecting capital to buy inventory, raise prices, or go out of business.
/sb
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Re: Harry Binswanger’s post 104615 of 4/10/25
Because it will make America great again if those unwanted factories in the rust-belt states start up again.
Don’t forget the tragedy of late-19th century farmers put out of work by tractors. Why, the bodies of starving workers were piled like fireplace wood in the streets! Jobs?! You Rightists want jobs?! Outlaw tractors and even animal-pulled and human-pushed plows. The earliest farmers used sticks to make seedholes in the good earth. If that doesn’t cause full employment, I’ll eat my hat.
*sb
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Re: Gregory Turza’s post 152947 of 4/10/25
My post was unclear in its target. What I was working to show was that the tariffs have to be paid for by the consumer, that the exporter can’t “absorb the cost.”
This false idea of the foreign companies like Lindt & Sprungli paying the tariff is what makes the average person think the tariff won’t hurt him.
And yes, I confused return on sales with return on invested capital, but it doesn’t change the point.
*sb
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Re: Gregory Turza’s post 152947 of 4/10/25
The importer then has to raise prices to cover its increased costs. Sometimes it will spread the pain around
The science of economics is possible because everything affects everything, always, necessarily, even if difficult to identify and measure.
*sb
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Re: Harry Binswanger’s post 104615 of 4/10/25
Let them eat Hershey’s.
Where does Hershey’s get cocoa beans? Damned if you do, and damned if you don’t.
An ironic set of facts I heard recently is that the United States imports almost 100% of the heavy crude it refines into products domestically, and it exports almost 100% of the light crude it extracts from the earth, and these two numbers in barrels of oil are almost exactly the same.
The heavy crude is priced higher and the refiners are willing to pay for the resulting efficiency.
A huge tariff placed on oil imports would tend to force refineries to use unsuitable light crude or go without supplies. Eventually the refineries might develop efficient ways to use light crude at huge capital outlay. The beneficial and profitable trades above would become much more costly.
/sb
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Re: Harry Binswanger’s post 104615 of 4/10/25
Marty: “Look, I know me. If someone doesn’t stop me, I’ll buy a Kia truck when I should buy a Ford F-150. So I’m voting for a president who’ll make the Kia truck too expensive for me.
Another way of describing tariffs is to say every time someone buys a foreign good, the government sends a goon out to slap him in the face and take some of his money for the government.
So, because the Chinese (or Canadian or Mexican or German) government is doing this to its people, that makes it imperative that the US government do the same to its people for buying foreign goods. The result is bloody faces and poorer people in each country.
I can do without that kind of logic.
/sb
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