Clarifying the Tariffying

Tariffs are essentially taxes imposed by a country on goods imported from abroad.  They serve multiple purposes: generating revenue for the government, protecting domestic industries from foreign competition, and sometimes as a tool in trade negotiations.  When a tariff is applied, it increases the cost of imported goods, making them less competitive against domestic products. This mechanism can be seen as a form of protectionism, where the government aims to bolster local industries by making foreign goods more expensive.  However, the burden of tariffs often falls on domestic consumers who end up paying higher prices for these goods as importers pass on the additional costs, something that is happening in real time for some of Atlas’ clients.

In 2024, the United States saw a significant increase in imports, reaching a total of $4.11 trillion. If a 25 percent tariff were to be applied across the board on all imports, the potential revenue generated would be substantial.  Using the total import value for 2024, a 25 percent tariff would yield approximately $1.03 trillion in revenue, equal to almost half the income tax collected during the same period. This calculation assumes that the tariff rate is uniformly applied to all imports, which in practice might not be the case due to exemptions, trade agreements, or specific tariffs on certain goods.  It also presumes no reduced importing as a result of the tariffs.  Nonetheless, this figure illustrates the significant financial impact tariffs can have, not only on trade but also on government revenues.  However, the economic implications of such a broad tariff would be complex, potentially leading to retaliatory tariffs from trading partners, affecting domestic industries reliant on exporting goods.

One of America’s importers is a client of Atlas.  Each year Ron R. sells a variety of games, some of which are manufactured outside of the U.S.  Earlier this week, he was hit with his first tariff.  When his shipping container arrived at the port with contents valued at $80,000, he was forced to pay an additional $8,000.00 to the Federal Government.  This of course was not accounted for when he first made the order.  Nevertheless, he complied, fattening Uncle Sam’s coffer.  Now, this did not happen in a vacuum.  Instead, Ron R. must adapt and adjust.  Virtually immediately, he increased prices.  Since he already had some of the SKUs in his warehouse from previous orders, he did not raise the price 10 percent (the actual tariff charged) but noted he may have to if the tariff continues.  Raising prices wasn’t the only adjustment made.  Instead, he also asked for concessions from his overseas supplier, which may not happen.

In this case, the impact of newly-implemented tariffs were not fully realized, but generally speaking the full impact nationwide may work its way through over the next few months, cetera paribus.  Nevertheless, the anecdotal evidence Atlas is privy to has not started off so well for consumers.  Transitions are typically messy, and the globe seems to be in the middle of one.  Inevitably, equilibriums will adjust, but there could be some friction ahead.