Commentary
The trouble with tariffs
By John McCauley
Whether this is just preelection populist bluster or not , it is reasonable for importers to plan for tariff disruption .
While freight contracting for 2025 may seem a long way off for many , the factors affecting the strategy for beneficial cargo owners ( BCOs ) for next year are more immediate — and potentially exponentially more disruptive .
The most immediate is the outcome of the US presidential election on Nov . 5 . A Harris administration is likely to keep the status quo vis-à-vis China . A Trump administration has declared a tariff war on all countries , but particularly China . Whether this is just preelection populist bluster or not , it is reasonable for any importer in the US to plan for a scenario of tariff disruption and major unpredictability .
The most likely outcomes if a Trump administration delivers its ( most recent ) promise for 200 % tariffs would be an unknown , unplanned increase in landed cost from a single destination . Or it could potentially be different landed-cost increases should the importer have the same or similar products sourced on a distributed basis — i . e ., from multiple origins .
What is also unknown is the timing of any increases , whether they will be across the board for all imports , and whether they apply to product already on the water or only to goods sourced after a certain date . Many other variations could also apply .
Importing BCOs in any of these scenarios need to involve all parts of the organization now because these outcomes — and others they will also have considered — will affect their ability to sell and compete in the US .
Let me clarify . Take a scenario where a business competes with locally assembled and / or produced goods or even goods sourced from somewhere other than China .
As of Nov . 4 , you have a likely comparative advantage as the lower-cost player . Depending on where you import from , that advantage may disappear on Jan . 6 , 2025 , assuming price is the key determinant of consumer purchase decision-making ( not allowing for your competitor ( s ) claiming “ Made in the USA ” to further erode your advantage ). You would have an existential problem and would immediately need to raise your prices , even before you take any other action . You would then need to reconsider your sourcing strategy , assuming you have no domestic production . It is reasonable to assume your suppliers will have a limited margin to reduce their price ; shipping is subject to major fluctuations , although you can try to smooth your imports , which will increase inventory and warehousing costs .
And tariff action does not leave US exporters untouched . Increased tariffs on imports would likely prompt retaliatory action by the governments of the affected origin countries . This may mean the usual ways of suddenly discovering that US-origin products don ’ t meet a new , unheard of or unneeded requirement that only affects US-origin products — ranging from tariff increases or outright bans on imports ( again , assuming the product is not competing domestically and is needed ).
The options for the exporters are more limited but no less problematic . If the product is a traded agriculture product , then the options are to increase prices or not buy or trade at all . Alternatively , as for secondary ( business-to-business ) or final state ( businessto-consumer ) products , the option is to push the product to the domestic market or to other nonretaliatory international markets .
The remaining option for those exporters is to stop production . This will reduce operating expenses but increase costs , as there is less volume to spread selling , general and administrative costs and other operational fixed costs .
The industry that should convince the Trump administration of the folly of tariffs is the automotive sector . While there are many imports of foreign cars , these are for a specific consumer section that does not overly impact most of the domestic production . Raising tariffs on these vehicles may not actually reduce their demand .
However , by penalizing importers , there is the risk of retaliation , which could have awful consequences for the export of automotive parts made in the US . Finally , if China is targeted , you can imagine the impact for Tesla sales in China , notwithstanding that it produces many cars locally in China .
None of these options and alternatives are viable in the long term and they will do significant harm to companies and individuals / voters . Let ’ s hope economic sense prevails .
The other looming issue is the completion of the master contract between the International Longshoremen ’ s Association and the United States Maritime Alliance . It is too late now to change tack should these negotiations blow up before the Jan . 15 deadline . The only encouraging thought is volumes are usually lower in January and some inventory delays will probably not greatly affect operations , assuming importers have some degree of buffer inventory .
email : john-mccauley1 @ outlook . com
44 Journal of Commerce | November 4 , 2024 www . joc . com