Learn me about tariffs

Example:

I built a CNC router and needed to buy a high-speed spindle motor. I found it at a very good Chinese supplier and ordered it. The Chinese supplier warned me that some US customers have had to pay up to $$$ in tariff charges, which is between the buyer and Customs. Several weeks later it's stuck in Anchorage (or it may have been Memphis, don't remember). Customs sent me an email, wanting a bunch of forms filled out, which I did, replying to their email. After a couple more weeks, Customs said I hadn't replied, so they sent it back to China! Keep in mind that the motor is over 40 lbs, so freight was a big deal. I and the seller went back and forth about what to do, as I had all but given up getting it through Customs. They convinced me to give it one more try, this time using a different carrier. This time, it flew right through our system and I had it within a week - no nothing from Customs. Okay, so there's that, that Custom's involvement seems inconsistent. Now the rant.

I understand what tariffs are supposed to do: protect domestic sources by punishing foreign producers with additional fees on the products. The idea is that the buyer will be put off by the high price and instead locate a domestic source. Okay, got it, but here's the problem: There are NO domestic manufacturers for this type of spindle motor, none, zero. Here's a case where the supplier's price is artificially inflated by our own government, and if I want the produce, *I* have to pay the higher price, as there is no alternative. I can't help but see this as punishing not the seller, but the buyer, as my choices seemed to be to, A. Pay the tariff to get what I want, or B. Don't use that type of spindle motor. There are some others... made in Germany, so that situation is no better.

That's the problem with tariffs particularly those that are broadly enacted.

Short-term fix: order a hoard of those spindle motors right now just to be safe.

Whoever does the import paperwork has to assign a country of origin and an HS code to the goods. It is pretty much an honor system and I expect someone just wrote Taiwan or Japan or used a non duty HS code on the form the second time. Sometimes you can play with the codes to get the result you want. For example an electric motor could be an electric motor, or it could be router parts. One may be tarriffed and one may not. 

Tariffs are not really intended to "protect local businesses" -- that's just the way politicians spin it to try to convince people that they're not evil.

Tariffs are really about "rent seeking", which is where one group of people uses government force to enrich themselves at the expense of other groups of people.  Sure, there's no one who makes those spindle motors in the US (or wherever you live) today, but likely there was at one point.  Either that or the particular tariff law that was passed was written sufficiently broadly that it covered some things that the people who paid for it didn't intend to cover but didn't care enough about to get it changed before being passed.

Tariffs reduce economic efficiency and thus make both countries worse off as a whole.  They only benefit a small subset of one country and that is outweighed by the cost to the rest of that country.

Tangentially related, like corporate income tax that people like to talk about.

If a business needs to make X to make Y to be profitable. If you increase their costs, through taxes/regulations/etc, do you think they reduce their profit margin or do they increase the cost and pass it on to the consumer?

In reply to z31maniac :

Depends how elastic the demand for their product is. The saying that "businesses don't pay tax, customers do" would only be true for businesses selling products or services with perfectly inelastic demand. Healthcare is probably the closest to that. Businesses with the most elastic demand might be minor luxuries people buy occasionally for recreation like movie tickets or ice cream on a cone. Gas is actually somewhere in the middle, and if that's surprising try to remember the time when CRX HF prices were headed to the moon and hypermiling and WVO conversions were going mainstream, and how quickly that whiplashed into American automakers resurrecting multiple muscle car marques when gas prices dipped a bit.

In reply to z31maniac :

My boss reordered a bunch of circuit boards to be loaded for a unit we make to measure coating thickness a bunch of years ago (you know the time period) and was surprised to see "25% tarriff charge" added to his bill.

I would assume the tariff charge is on the cost paid to China and not USA retail , 

So part of the new retail price will include whatever percentage of the tariff  gets passed on and not absorbed by the importer.

China still gets paid 100%  unless they want to lower the price to help the importer .

Tariffs still ends up raising the USA retail price.

Your error was trusting the chinese supplier to handle the shipping logistics.  They can screw things up and do not care.  I use DHL to handle any shipments from outside the US.  Before I learned about DHL I trusted the supplier and ended up wasting a day going between a customs guy and a bonded warehouse, writing checks and carrying a document back and forth.  Tarifs, taxes, certification paperwork will always be a pain.  Paying someone else to handle it  worked for me.

Keep buying that Chinese junk.  China is not a fair trading partner. They manipulate currency, do not honor our patents and charge large tariffs on goods made in the U.S.  That is why I was laid off of my job of 25 years because I refused to set up contracts with Chinese suppliers.  I believe in buying from fair trading partners.

Mustang50 said:

Keep buying that Chinese junk. 

You already do.

In reply to GameboyRMH :

It sounds like you are saying tax / tariff costs are not passed on in in-elastic demand products because in those cases the consumer can choose not to buy them. Is that correct?  In that case, the price increase is still passed along, even though the cost may not be. 

Of course, if the demand for the product decreases, the tax / tariff is essentially killing that market (or at lease making it less viable).  E.g. tax on movie theaters, going to movies becomes more expensive, people go to theaters less, theaters loose business / go out of business (in this case, possibly increasing prices even more to try and compensate for lost revenue).  This of course can be intended / useful with things like cigarettes and alcohol, that you are trying to discourage use of (social manipulation).

One way to look at tariffs is that they increase the price of a products to make it more viable for someone with higher production cost to make and sell that product (e.g. US vs China), while also making sure those with lower costs (the ones with the tariff on them) do not just make more profit (extra profit is taken by the state).  Theoretically spurring domestic production.  But, if no one produces domestically, as in the case above, it simply just increases price (pointless, other than state revenue).

In reply to aircooled :

With products with more elastic demand, the customer can choose not to buy them, so companies are more likely to hold prices stable and let the tax increase eat into profit margins than to pass the cost along entirely, since that could kill their sales and cause a big loss of revenue. If demand is inelastic, the customer has little choice but to buy the product so companies are more likely to pass any increased tax costs straight onto customers to maintain profit margins.

bearmtnmartin (Forum Supporter) said:

Whoever does the import paperwork has to assign a country of origin and an HS code to the goods. It is pretty much an honor system and I expect someone just wrote Taiwan or Japan or used a non duty HS code on the form the second time. Sometimes you can play with the codes to get the result you want. For example an electric motor could be an electric motor, or it could be router parts. One may be tarriffed and one may not. 

An email from one of my Taiwan customers: "Moreover one more issue for Harmonized Tariff Number can you please leave it blank or use 90249000005. For this code our import duty is 0%, whereas the one that you use 903300900040 duty is 5%. "

In reply to Jerry :

Believe me I know that, but I'm not happy about it.

Mustang50 said:

Keep buying that Chinese junk.  China is not a fair trading partner. They manipulate currency, do not honor our patents and charge large tariffs on goods made in the U.S.  That is why I was laid off of my job of 25 years because I refused to set up contracts with Chinese suppliers.  I believe in buying from fair trading partners.

Oh I completely agree, but there are NO US manufacturers of spindle motors that I was in search of, so... ? Does buying from Germany get your approval? Doesn't the same tariff also hit them, so they/I are being equally punished? Lastly, about Chinese stuff being "junk", I think much of that is us being unwilling to pay more for actual high quality products.

kb58 said:

Mustang50 said:

Keep buying that Chinese junk.  China is not a fair trading partner. They manipulate currency, do not honor our patents and charge large tariffs on goods made in the U.S.  That is why I was laid off of my job of 25 years because I refused to set up contracts with Chinese suppliers.  I believe in buying from fair trading partners.

Oh I completely agree, but did you read my entire post? There are NO US manufacturers of spindle motors, so... ? Is buying from Germany approved? If so, isn't the same tariff in effect?

I believe some tariffs are per-country, others apply to all countries.

kb58 said:

Lastly, about Chinese stuff being "junk", I think much of that is us being unwilling to pay more for actual high quality products.

My experience and understanding of the prevailing wisdom is that - China is capable of manufacturing products as well as anywhere else. It's purely a factor of what kind of quality control standards they are being held to. They will do the cheapest, quickest, sloppiest job that they are able to get away with.

So the way to get well made Chinese goods is to go through a U.S. or other western company that is going to keep an ongoing relationship with that Chinese manufacturer. That way the factory has to produce sufficient quality to keep them happy to keep the money coming in. You as the end consumer have a responsive local person for support.

Business is very much like racing. It is highly competitive and everyone is looking for and edge. Cheating is a badge of honor, not a crime. 

A tariff is no different than a handicap such as extra weight mandated in a race-car. It is meant to level the playing field. Do tariffs work? Hard to say. NASCAR would be the epitome of such a system where the playing field is designed to be level for everyone regardless of any team-specific advantages such as talent , technology or sponsors. NASCAR makes a lot of money from the "competition/show" and the public pays the cost without really being aware that it is buying an inferior product in order to support the "Show"; aka "Economy". There is a lot to be said for this formula.

As consumers, tariffs do nothing for us. Tariffs might allow the home team to produce and market items for the same net cost to the consumer, but the product  itself would not be any better because quality or performance is no longer a competitive factor. So you replace chinesium with US-bullonium at the same price. At best I could care less since I am paying more for the same thing. The Gov is  a fan because  the tariff scheme does create  revenue if people buy imported junk and increased GDP if the junk is made locally and jobs and tax revenues result. But the consumer does pay more regardless, so it is a tax.

kb58 said:

Mustang50 said:

Keep buying that Chinese junk.  China is not a fair trading partner. They manipulate currency, do not honor our patents and charge large tariffs on goods made in the U.S.  That is why I was laid off of my job of 25 years because I refused to set up contracts with Chinese suppliers.  I believe in buying from fair trading partners.

Oh I completely agree, but there are NO US manufacturers of spindle motors that I was in search of, so... ? Does buying from Germany get your approval? Doesn't the same tariff also hit them, so they/I are being equally punished? Lastly, about Chinese stuff being "junk", I think much of that is us being unwilling to pay more for actual high quality products.

Germany at least has similar (or better) labor laws. You're not paying a 12 year old $3 for a 12 hour shift to make the widget. 
 

So in my mind... yeah, Germany is way better. 

Thru the years many countries have added  large tariffs for auto imports and then gave tax breaks to companies that built cars in country with a certain percentage being "local content" 

So  "knocked down kits" were  made so that car bodies could be assembled in a 3rd world country  with no stamping presses and the local content was interior , glass , labor etc

I wonder if the Chinese EVs companies will try that ?

Beer Baron 🍺 said:

My experience and understanding of the prevailing wisdom is that - China is capable of manufacturing products as well as anywhere else.

Yes, as one example iPhones and Apple laptops are manufactured in China, and yet are high quality devices.  Lenovo (a Chinese company) bought the ThinkPad brand from IBM (commonly regarded as the highest quality PC laptop available at the time).  Everyone expected they would ruin it, but almost 20 years later they still make great products.

In reply to Jerry :

For a one time transaction you are probably ok but if you import more often using the wrong code you will be nabbed eventually. And then you open tax evasion doors that should stay closed.  And it is the importer who is responsible, not the Chinese factory only interested in selling their stuff and giving fraudulent information to do so.

In reply to bearmtnmartin (Forum Supporter) :

For my example I don't think it matters as much.

They are a distributor for calibration equipment, a good chunk of stuff we send back/forth is "repair/return" which only needs a carriage value of the item, it isn't being sold by or to either of us.  They do however sometimes buy new E36 M3 and that would make a difference, but I think both of those codes fall under "misc/other accessories" for something like Xray equipment or something generic because we're a bit of a nitch business.