The United States has a president who worships tariffs. Before Trump, it is likely few had ever considered what they were nor their implications. I state this because we see a lot of misconception uttered online (imagine that) regarding them.

To start, my fear is that the tariff wars will collapse the global economy. Trump is talking about the golden age. Well, in my view, if this gets out of hand, that gold will turn to a steaming pile of you know what.

Basically, he is wrong on his assessment of tariffs. Trying to replicate the late 1800s is utter foolishness. The economy is far different, more complex, and integrated that at that time. Also, the United States, itself, was at a different place. To a large degree, the US was to Europe what China is today.

That said, Trump is doing his thing and we can only navigate around it. This is coming on top of an already weak global economy. So let us look at what is going on and how things will be affected.

Tariff Reality

One of the keys with tariffs is the amount of a product that comes from a particular country versus what is domestic.

Probably the best example of this is automobiles. We often see studies which reflect the "most American made" car. This is done by breaking down the percentage of parts that are domestic versus international.

Unfortunately, this is misleading when it comes to tariffs. We can look at an EV.

If, for example, most of the vehicle is US made, then the tariffs on a $50,000 cars should be rather low. Again, if 90% of the car parts are from the US, then only $5,000 is subject to tariffs.

This is incorrect.

We have to look at the percentage of the vehicle in terms of dollars.

Using the EV, even if 90% is from the US, if the battery pack, which can account for 1/3 the cost, is imported from a country that is tariffed, then things change. Using our example, this would put the tariff on $17,000, not the $5,000.

As we can see, it is a major difference.

Job Losses

Tariffs end up as deflationary. I know this is counter to what most economists claim but it is what tends to happen.

This all starts with the premise that the tariff is not solely passed to the customer. Instead, it is absorbed throughout the entire chain. Wholesalers, importers, distributors, dealerships, and retail outlets all feel the pinch. Naturally, they would prefer to throw all of the tariff difference on the price. Unfortunately, this affects the affordability of the product.

Here is where people turn to other alternatives. They might step down in product, saving money. If possible, an alternative, even if not perfect, could be selected. Or they simply my not purchase.

To avoid this, the tariff is negotiated throughout the channel. This means margins tighten, causing profits to diminish. When this happens, companies tend to start cutting the expense side of the income statement. Since payroll is usually the largest expenditure, companies often start there.

Jobs are lost as companies look to cut. This ends up echoing through the economy.

Hopefully Trump is using them as a negotiating tactic and will pull back many of them in quick order. Isolated tariffs can be effective, especially when a viable domestic alternative exists. However, blanket tariffs that keep escalating will only end in recession.

Posted Using INLEO