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Comment by tuatoru | Hacker News Reader

In my trade economics textbook years ago it was stated that the cleared customs cost of an imported good is no more than 30% of its final consumer price, and more typically 10%. The rest is inland logistics, retail costs, and marketing.

Further to that, 80% of the economy is services or otherwise has nothing to do with imports. Tariffs are not affecting haircuts or yoga classes or bank fees.

Seems to me like tariffs are being used as a convenient excuse.

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Right, but if you double the cleared customs cost with a 100% tariff, many of those additional costs are levied as a constant margin, which tends toward doubling the retail price.

You might argue that the retail channel can eat the difference, but it doesn't make sense to make the same absolute margin on goods that are subject to volatile tariff policies. It makes it hard to predict how many units will sell, how much stock to maintain, and creates a big risk that any units on shelves will suddenly be devalued when these tariffs are rescinded.

you can't actually argue that the retail channel will eat the difference. that would be arguing that the financial market would eat the difference, and that's exactly what financial markets will not do. nor do you want them to, since the money in financial markets is your pension.

lay people have a broken view of what goes into a price and a profit, thinking that a "fair" profit should be some "reasonable" percentage. It's just not how it works, it works on multiplied rates. the financial markets exist to give large companies working capital. if the companies need double the working capital, the shareholders/bankers want double the returns. the alternative would be you getting a letter saying "hey, the returns on your retirement account are going to be halved, think of it like your retirement account is now half the size"

It would be fine for the overall increase in markets to be much less, if you just take the gains away from, say, the top 10% and give them to everyone else.

>Right, but if you double the cleared customs cost with a 100% tariff, many of those additional costs are levied as a constant margin, which tends toward doubling the retail price.

I’m sure you can find short term examples of this, but in the long run consumer products tend towards a pretty “fair” price given the cost of retail, marketing, shipping, returns etc - all of which are things that do not anywhere near double when you pay a tariff. Your fat margins are someone else’s opportunity; walk around Walmart or Home Depot or Amazon and you won’t find a lot of fat margins. So no, you won’t double retail prices.

Just because some retailer makes 3-5% profit overall, doesn't mean that the gross margin on each product is 3-5%. It very much isn't. I've heard doubling the import cost is typical. This allows enough margin for holding stock, the warehouses, floor space, lighting, staffing, transportation, insurance, promotion, clearance, etc., which eat up most of this gross margin.

The fair price accounts for all of these costs, which are significant, even at scale.

I’m not sure exactly what argument you’re making here, but if you want the sticker price to double when the tariffs equal the import price then you need one of three things: 1) imports directly to consumer, 2) every cost must be in direct proportion to the imported cost, 3) someone must end up with astronomical margins.

1) makes up a tiny fraction of trade. Case 2 is obviously unrealistic. I will lay out a simple example for case 3: WidgetCo sells a widget in partnership with MarkCo for marketing, InsCo for insurance and JungleCo for warehousing and shipping.

Widget costs $10 in China and shipping to the US warehouse is $2. Marketing is $8: 3/4 fixed costs and 1/4 commission based. Shipping from US warehouse to the customer is $6, warehousing costs are $2, and insurance is $1. All the company’s other internal expenses are 15% of imported widget cost plus $1.50/widget totaling $3 per widget. That totals $32/widget and they sell for $33, a 3.0% net margin or $1 net profit per widget.

Now, let’s imagine that tariffs have just increased from 0% to 100%. Shipping and warehousing are fixed costs. Being generous to your point, let’s say marketing commissions and insurance are calculated on the imported price (which is unusual.) That brings the new cost to $46.5, with a retail price of $47.95. That’s a 45% increase, nowhere near doubling. If you want the price to double, you will end up with astronomical margins. InsCo’s margins remain the same, but WidgetCo now takes $8 per widget, of which $2.05 is additional pure profit. Net margin is now 7.3%: (1.45+2.05 or $3.50 per widget.) 2.35x the net margin in a competitive industry? You’re toast, buddy. But it’s far worse for MarkCo and JungleCo. Both MarkCo and JungleCo are now raking in $16 for work they used to do for $8. If their net margin was 10% before, now it is 55%.

Now, it’s worth pointing out that the numbers in this example are quite generous to your point. In reality, most products are not sold for three times their Chinese factory cost, and many products have (legitimate or not) processing steps in other countries, or steps which could be easily relocated to other countries, which is of course what happened with the first Trump tariffs.

Import taxes can affect the price of, say, yoga classes. Not direcly of course (unless maybe you're following a correspondence/video course from India where you need to buy imported tapes), but you can think of it like this:

The price of food is based on the price of domestic produce and the price of imports. If taxes are levied on food imports it will raise the mean price of food. As yoga instructors need food to do their job (in fact, they need it to live), they would have to raise their prices.

What was the textbook and would you recommend it? This is an area where I would like to read something substantial and good.

I think it was Krugman and Venables. But it was a long time ago.

(Paul Krugman's expertise is actually in trade economics, before the NYT hired him to talk about all kinds of other things.)

The biggest costs for businesses are labor costs and capex. So indirectly higher prices (inflation caused by tariffs) will demand higher wages for workers and cause higher prices for consumers for services seemingly unimpacted by tariffs.

Bingo.

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