There’s no better time than now to set the record straight on tariffs and price inflation. Back in 2015, while teaching a course in Retail Fundamentals at The Columbia Business School as Director of Retail Studies and an Adjunct Professor, a student asked me to explain how, exactly, Mexico was going to be compelled to pay for a wall along the U.S. and Mexican border. You may recall that this was one of Donald Trump’s declarative statements as he descended his gilded escalator to announce his candidacy for the U.S. Presidency.

Any mechanism for imposing a tax, duty, levy or tariff on products or merchandise crossing a border into the U.S. would have to be borne by the U.S. importer, manufacturer, brand or retailer … and then that added cost would inevitably be passed on to the U.S. consumer as a higher retail price.

Border Lines

I replied that there was no way that I could conceive that Mexico could be compelled to pay for a wall on U.S. territory. Furthermore, my view was that any mechanism for imposing a tax, duty, levy or tariff on products or merchandise crossing the Mexican border into the U.S. would have to be borne by the U.S. importer, manufacturer, brand or retailer … and then that added cost would inevitably be passed on to the U.S. consumer as a higher retail price.

Net, net, as we all know, Mexico never paid for a U.S. border wall

A Tariff Primer

To more fully understand the mechanics in which tariffs and other financial artifices of international trade such as duties and taxes are imposed, consider these definitions:

• Duties are financial burdens placed on things based upon underlying product characteristics such as a duty placed upon all steel products imported into the U.S. or a duty on the aggregate value of a U.S. traveler’s overseas purchases when they return home.
• Tariffs are financial burdens placed upon specific imported categories or products such as 100 percent cotton men’s or women’s shirts, for example.
• There are other artifices in place outside of the U.S. known as VATs (Value Added Taxes) that are taxes based upon, again, the aggregate value of imported goods.

From Cradle to Your Closet

But now, back to my principal focus on tariffs. In all the retail courses that I have taught, I presented a “cradle to consumer” process of product development and international trade.

• Using a woman’s cotton blouse as an arbitrary example. its life might begin when a cotton crop is harvested somewhere in the world, or for a blouse made of synthetic fabric when a barrel of oil is extracted from the ground Next, the cotton is spun into fibers, or the oil is processed into a synthetic product such as polyester which is also converted into fibers. These raw fibers are then converted into a yarn which may then be dyed to a specific color or left in a “greige” unfinished state.
• Yarn is then knitted or woven into a fabric that now may be dyed and finished, or, in some cases continues to be left in a “greige” state. This fabric is then “cut” and “sewn” into a blouse and at this point may be “garment dyed” if a color has not already been introduced. The blouse is then finished or trimmed as it is made ready for shipment. “trim” is the third leg of the production process (known as CMT) which includes labeling, laundering, pressing, folding, packaging etc.
• Our blouse is now ready to be shipped from its manufacturing site to its now new “owner” – a brand, another manufacturer or a retailer any one of whom becomes the blouse’ importer of record. The importer takes possession of this blouse and pays its manufacturer for it based upon its agreed upon “First Cost.” The blouse now proceeds from a point of origin to a port of entry, typically across an ocean on a plane or ship or across a border on a truck. Upon arrival in the U.S. port of entry, the blouse acquires a “Landed Cost” which now in addition to its first cost, includes the cost of transportation to the port of entry plus any imposed duties or tariffs.  In fact, in the jargon of the trade, this blouse has now arrived at a “Landed Duty Paid” cost. To pass through customs and be allowed entry, the U.S. importer of record of this blouse must pay to the U.S. Treasury Department any tariffs or duties that have been imposed.
• The blouse tariff, if imposed, now is a part of its U.S. cost basis which includes its importer of record’s ongoing transportation, distribution, marketing and selling costs and expenses plus, of course, a profit component as well. The blouse is eventually “marked up” from this underlying cost basis to a retail price which the consumer bears when she buys this blouse.

The effect on the consumer of a tariff imposed on this blouse is no different than a decision that might have been made to use a more expensive fabric or “finding” such as a zipper or button in the manufacture of the blouse. So, here’s the key point: Whatever makes the blouse more expensive results in a higher retail price paid by the consumer. That fact is as irrefutable as one of Newton’s Laws of Gravity.

Border Redux

In 2018, during another of my retail courses, I was outlining what I have just described, but in considerably more detail. Trump, now President, announced his decision to impose $50 billion in tariffs on Chinese goods. He proudly proclaimed that China would be forced to pay these tariffs just as he had said earlier that Mexico would pay for his wall. A student in class interrupted me and pointedly asked just how it would come to pass that China would pay for these tariffs.

I patiently went back to the blackboard and again went over my “cradle to consumer” thesis. My student, much to my surprise and the surprise of the rest of my class, pushed back aggressively saying, “How can you dispute the fact that our President has made it very clear that China will be forced to pay for these tariffs?” 

After attempting, once again, to explain what I had set forth earlier I finally said, “Trump is wrong. Trump is either ignorant of the way tariffs are imposed and who bears the price when they are imposed, or he’s lying.”  My student was very upset. I thought at the time it was really hard to understand how an accomplished and sophisticated graduate student at an elite school could be duped into believing an obvious trade practice falsehood like this.

Déjà Vu

So, here we are four years later, and Trump is at it again stating if reelected, he will impose hundreds of billions of dollars of new tariffs on China — that China will pay for. Americans have, will and will always pay for artifices like tariffs which almost always result in price inflation as well as in retaliatory actions taken by trade partners. This is why no knowledgeable trade experts support tariffs. We’re having a déjà vu moment: Is Trump’s plan based on ignorance or is he lying? We need to set the record straight. You decide.