Costly Imports?

There's a certain topic that, prior to the passing of the Pope, dominated news headlines worldwide. It was on everyone's lips, roiling minds everywhere as impact scenarios ranged from a national sense of beatific happiness to global economic disaster. Of course, we are discussing Donald Trump's new, lighter hair color, one that has captured the attention of the world and—

Okay, it's tariffs.

Tariffs turn basic economics into a game of 3D chess. Unlike the basic supply and demand model for costs, tariffs (i.e. taxes) bring politics into pricing. Tariffs are taxes assessed as a percentage of an imported good's value. Here in the US, companies that import foreign goods have to pay the tax to the federal government. To offset the costs to their bottom lines and impacts to their stock values, those firms could—I repeat: could—pass some or all of the increased cost on to customers or they could offer US consumers even more products suffering from "shrinkflation," which was already a massive problem before the 2024 election. So, now it's same demand, same supply, but the costs and remedies could vary greatly.

To get a better understanding, I posed a fictional scenario to an AI. Here is the session:

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PROMPT:
In general, speaking not about any politician or even any country in particular, I need to understand tariffs. That is, let's say there's a company named "WishCo" in a fictional country named "Wishdom" and they ship products to a company named "NeedCo" in their country of "Needland." Needland has a 35% tariff on all products from Wishdom. Who pays the tariff: WishCo, the nation of Wishdom, NeedCo, or Needland?

RESPONSE:
Great question! In your fictional scenario, Needland has imposed a 35% tariff on all products from Wishdom.

The party that typically pays the tariff is NeedCo—the importer in Needland. Here’s how it works:

- When WishCo ships the goods to NeedCo, the shipment arrives in Needland and goes through customs.

- Needland's government imposes the tariff—a tax of 35% on the imported goods.

- NeedCo must pay that tariff to Needland’s government before receiving the goods.

So, while the tax is imposed by Needland, the burden falls on NeedCo. However, the cost of tariffs is often passed along in some way:

- NeedCo might raise its prices for its customers in Needland to offset the tariff cost.

- WishCo might try to help by offering lower export prices to stay competitive.

- Both companies might negotiate a deal to share the cost burden.

But technically speaking, it's NeedCo—the importer—that directly pays the tariff to Needland's government.

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The above example shows that companies in the US that import foreign goods will be the ones to pay the tariffs directly. Additionally, in keeping with capitalistic economic principles, it would be Americans who would then need to compensate the importers for their increased costs via the imposition of higher consumer and business prices—all dreams of "they will pay" notwithstanding. The foreign companies and nations won't be paying, at least not in the beginning and not in the ways some would expect. Flagging demand for their products due to the higher tariffs could result in making them pay for tariffs not monetarily but through the stresses placed on their economies from lower demand.

The problem for the US in this is that we literally gave away our domestic manufacturing, so countries like China have a huge advantage because it would take decades to restore America's domestic manufacturing capabilities. Cities like Detroit and Pittsburgh were devastated when manufacturing left, and much of the US is referred to as "the rust belt" due to the plethora of rusted, abandoned factories scarring the landscape. 

To compete today with higher tariffs in place, I believe Americans need a complete rebuild and expansion of the US freight network to enable higher speeds and volumes; an expansion and modernization of Americas ports to accommodate higher export volumes; and the creation of modern, high-speed, long-distance passenger railways on dedicated high-speed tracks. Over the course of decades, the US will need to spend billions, even trillions, to re-establish America's ability to build products, move them quickly and with cost-effectiveness, and enable Americans to travel great distances at hundreds of miles per hour at reasonable prices for work and pleasure.

What do you think? Please let me know.

Regards,
TR

Note:
I published a version of the above
as a comment on Spacehey.