Here’s how tariffs work (I import stuff from china)
I find a Chinese manufacturer of widgets and negotiate with them. One of their first questions is, what incoterms do I require? I tell them EXW which makes their quotation the easiest to provide.
EXW means that once the goods are ready, I’ll send my shipping agent to go get them and bring them to me in my country.
I call my agent and tell them to get the goods. They ask a lot of questions about the contents of the goods and figure out which HS code to use, which is a classification of what the goods are (such as bicycle tires, or unfinished lumber, or whatever).
The agent prepares an assload of documentation for my shipment. They send a truck to the Chinese warehouse, get the stuff, load it into a container, take it to a shipyard. It’s loaded, boat moves to the US, boat is then unloaded, and my container is put into an inspection queue.
The shipping agent forwards the documents about my container, which has not been released, to US customs. US customers decides if they want to manually inspect it or not, and then issues an invoice for the taxes. My agent calls me and says Mr. Nucleative, your customs bill is $9,845.50.
I pay them, they pay the US customs office. Customs releases my container.
The truck is cleared to pick up my container and drive it to my warehouse.
Now I unload and sell the goods to my customers.
Did you notice in step #4 that I paid the import tariffs? Now my cost to get the goods to my customers went way up. My margins are pretty thin, so I can’t do this business unless I charge my customers more or else I’m running a charity. Now, my customers have to pay me more. That money goes straight to the US government.
Hypothetically now it’s less unattractive to set up a factory in the USA, encouraging more local jobs. But damn, did you know we also need to import rubber, and metal, and machine parts, and cardboard for packaging, and all the other raw supplies either way? The local factories, if there are any, can probably not increase production to meet demand anyways, at least not in a month or two. Does anybody remember what happend when demand outstrips supply?
There is no rocket science here, just people learning from the wrong people.
This is exactly what happens. I can pay 100% tariff on solar panels that I can’t source locally at all, but we have a tariff to encourage a nonexistent industry to not flourish. And so I buy panels that China routes through SE Asia instead and add 95% extra cost to do that. So panels I sell customers are twice what they need to be and so they buy half as much and make up the difference with coal-fired electricity.
Hey very interesting comment. I have a question: in which step do you normally pay the manufacturer in your example? Is this also handled via the agent?
The factory gets paid in step #1 (many can accept direct wire transfers or have Hong Kong/Singapore/ or even New York banks). Sometimes a deposit is made to start an order and the final amount is paid to release it from the factory after inspection.
There are agents who can handle funds on your behalf and when you work with a new factory or it is a super large order, it is common to use a service that will escrow the funds until the goods have been inspected and released.
Sometimes we even have our own staff monitor the assembly and packaging inside the factory to be sure the quality of parts we ordered are actually going into each piece. This is normal every day in Chinese factories, they know the game.
Here’s how tariffs work (I import stuff from china)
EXW means that once the goods are ready, I’ll send my shipping agent to go get them and bring them to me in my country.
I call my agent and tell them to get the goods. They ask a lot of questions about the contents of the goods and figure out which HS code to use, which is a classification of what the goods are (such as bicycle tires, or unfinished lumber, or whatever).
The agent prepares an assload of documentation for my shipment. They send a truck to the Chinese warehouse, get the stuff, load it into a container, take it to a shipyard. It’s loaded, boat moves to the US, boat is then unloaded, and my container is put into an inspection queue.
The shipping agent forwards the documents about my container, which has not been released, to US customs. US customers decides if they want to manually inspect it or not, and then issues an invoice for the taxes. My agent calls me and says Mr. Nucleative, your customs bill is $9,845.50.
I pay them, they pay the US customs office. Customs releases my container.
The truck is cleared to pick up my container and drive it to my warehouse.
Now I unload and sell the goods to my customers.
Did you notice in step #4 that I paid the import tariffs? Now my cost to get the goods to my customers went way up. My margins are pretty thin, so I can’t do this business unless I charge my customers more or else I’m running a charity. Now, my customers have to pay me more. That money goes straight to the US government.
Hypothetically now it’s less unattractive to set up a factory in the USA, encouraging more local jobs. But damn, did you know we also need to import rubber, and metal, and machine parts, and cardboard for packaging, and all the other raw supplies either way? The local factories, if there are any, can probably not increase production to meet demand anyways, at least not in a month or two. Does anybody remember what happend when demand outstrips supply?
There is no rocket science here, just people learning from the wrong people.
This is exactly what happens. I can pay 100% tariff on solar panels that I can’t source locally at all, but we have a tariff to encourage a nonexistent industry to not flourish. And so I buy panels that China routes through SE Asia instead and add 95% extra cost to do that. So panels I sell customers are twice what they need to be and so they buy half as much and make up the difference with coal-fired electricity.
The wonderfulness that is the invisible hand…
Hey very interesting comment. I have a question: in which step do you normally pay the manufacturer in your example? Is this also handled via the agent?
The factory gets paid in step #1 (many can accept direct wire transfers or have Hong Kong/Singapore/ or even New York banks). Sometimes a deposit is made to start an order and the final amount is paid to release it from the factory after inspection.
There are agents who can handle funds on your behalf and when you work with a new factory or it is a super large order, it is common to use a service that will escrow the funds until the goods have been inspected and released.
Sometimes we even have our own staff monitor the assembly and packaging inside the factory to be sure the quality of parts we ordered are actually going into each piece. This is normal every day in Chinese factories, they know the game.