April 2nd tariff scare.

[Paul Smith]

I got an E mail from an offshore supplier trying to goad me into a quick unneeded buy to "beat the 25% tariff of April 2nd".

I do not accept the premise of the entire tariff being passed on to the customer.  Offshore producers can beat US prices by A LOT.  If the try to tack on the whole tariff they will lose their ability to undercut US producers.  I believe that the cost of foreign production is so far below ours that they can easily absorb the tariffs and keep selling to US customers.  Without the US market, who will buy their stuff?

In the real world of business prices are set by the scientific  analysis of what is the most the customer will pay, not by simple cost accounting.

[Steve Helmick]

At least they didn't claim it would be April 1st!   

Some think DJT's threat of 25% or even 50% tariff is something "set in stone", a ridiculous and outlandish ranting. I suggest they consider it to be a starting point in the negotiation process. When selling, you don't start low and negotiate towards a higher price, right?

Another point of interest is the cost of production is typically around 25% of retail. Shocking? Like you wrote, there's room for absorbing some % of tariff. IDK for sure what price the tariff % would apply to, but likely the FOB price to the importer. Unlike the "VAT" tax they use in a lot of Euro countries. That is something like 20% in some places, and THAT is oppressive. Our WA State sales tax is "only" 10%, and they waste a lot of it.    Steve

[Paul Smith]

Right on !  Exactomundo, sir.

In the world of compromise and negotiation, you never open with compromise.  Wide open unlimited foreign dumping is an extreme position so a 25-50% tariff is good opener.

[Rusty]

I would like more information before I make a decision.  What is the website and what products are you talking about?  America does not make much stuff anymore, so I would like to know what we're talking about.  Thanks

[katana]

Another point of interest is the cost of production is typically around 25% of retail. Shocking? Like you wrote, there's room for absorbing some % of tariff. IDK for sure what price the tariff % would apply to, but likely the FOB price to the importer. Unlike the "VAT" tax they use in a lot of Euro countries. That is something like 20% in some places, and THAT is oppressive. Our WA State sales tax is "only" 10%, and they waste a lot of it.

I'm confused! So if a product is produced in, let's say Brazil?, and costs $25 to produce (materials and labour) and producer adds $25 to cover Packaging, Advertising and Profit, you get product for sale in Brazil for $50.
Importer brings it into USA having bought it in Brazil @ $50 and sells it originally for $100 (greedy individual!) Now the tariff @ 25% adds $12.50 - does the importer (US company mind) eat that 12.50 and reduce his margin (because fixed costs will remain the same) or does he/they put the sale price up to $112.50? Either way its the US importer or buyer that pays and if they don't pay or buy, they either loose money through reduced sales or don't have the product that can't be sourced from the USA at a comparible cost. The producer in Brazil still has the rest of the world market but may have reduced income via lack of US sales, so adds $5 to cover that, its still a cheap product, sold at volumes to maintain profitability . . . . . who has the tariff hurt? For instance, I don't see much Balsa wood forestry / logging occurring in the USA - but Mr T. wants those 'big, beautiful forests' production to be brought back into the USA (even if it never existed) - MAGA 

Its true that VAT is a sales tax, it used to mean 'Value Added Tax' and was applied, subjectively, to the degree of 'value / desirability' a product had - now it is routinely put on most products & services (in the UK @20%) but not everything, somethings are zero%, 5%, 7.5% or 10%. But because its a 'National' tax, everyone knows they will pay it and it is included in the ticket price or clearly added at bottom of an invoice. It one thing we Europeans can't understand - why the ticket price isn't the price you pay? Why do you have to do mental gymnastics to work out what the cost will be, especially when it varies from state to state? Also your Sales Taxes for us aren't refundable when we leave, whilst anyone leaving the UK or Europe can claim back any VAT collected on purchases - so who is subsidising who in this regard? 

[Ken Culbertson]

In the real world of business prices are set by the scientific analysis of what is the most the customer will pay, not by simple cost accounting.

I question whether most analysis is "scientific", but your method is correct.  First up is cost to produce a minimum quantity and maximum quantity and some kind of curve for the quantities in-between.  Now marketing has to figure out how many they can sell at various prices and what the advertising cost will be for each.  Match the two and pick the point where you maximize profit.  Last is to take that result and compare it to the margins from alternate uses of capital.  If you don't think the Chinese use a similar model, think again.  The tariff will just be another field in the analysis.  Prices are likely to come down as US companies enter the mix.  I know that sounds ridiculous, but they will be on a level playing field and will have to compete just like the Chinese.  Their delivery costs will be pennies against the Chinese dollars.  The Chinese ONLY leverage will be price therefore they will "eat" the tariff.

I could be entirely wrong but I have studied Trumps economic model long before there was a Trump and it works long term.  Tariffs were the main funding source for the government at the countries founding.  It is the "long term" that scares me.  With all of the lawfare going on Trump may not have enough time to show results before the midterms.  Implementing any plan causes disruptions in the business cycle.  Business will adapt to whatever the government throws at it but that costs.  Having to adapt all the time as they play "Wack a Mole" is what is killing us.  I often wonder just how much of the economy is simply complying with the regulations the government puts on it.  The ACA act for example.  Do you have any clue what the $$ cost is to a small business just to comply with it?
Ever read the instructions for E-file reporting?  Just 1 form of the ACA has a 100 page manual of specifications and regulations for reporting in the most difficult format imaginable.  And that is just to E-File, which is now mandatory, a form that they already have the ability to scan.  And now, because you are E-Filing you also have to comply with all of the HIPPA regulations covering protecting employee information.

Well the guy with the Shepard's staff is pulling me away from the microphone so I guess I am rambling.  Let me conclude that IMHO we must have deregulation till it hurts or we are screwed.

Ken

[Ken Culbertson]

I don't see much Balsa wood forestry / logging occurring in the USA - but Mr T. wants those 'big, beautiful forests' production to be brought back into the USA (even if it never existed) - MAGA 

Maybe that is because Balsa cannot tolerate temperatures below 41 degrees.  Only Hawaii and Puerto Rico have that and from what I read there are companies considering growing Balsa there.  But WTH, if you can't bash Mr. T. there isn't much point in posting.

Ken

[Brian Hampton]

I'm confused! So if a product is produced in, let's say Brazil?, and costs $25 to produce (materials and labour) and producer adds $25 to cover Packaging, Advertising and Profit, you get product for sale in Brazil for $50.
Importer brings it into USA having bought it in Brazil @ $50........

That's where the tariffs come in. The tariffs are applied on the purchase price to the importer which are collected at the customs port of entry and won't be handed over to the importer until he pays the applicable tariff. In round figures, if the tariff was 10% then, for a $50 purchase, the importer pays $5 which he will add to whoever buys from him.

Talking about VAT, Australia uses GST (Goods and Services Tax) at 10% which is applied to everything sold in shops (apart from fresh food) but the sticker price includes the GST on the advertised price of every item so that's what you pay at the check out, no mental gymnastics required .

[RC Storick]

  Put enough pressure on and the tariffs will be zero both ways. At least that's the goal. 

[Paul Smith]

If President Trump succeeds in doing away with OSHA, EPA, and other government agencies that make American industry illegal, at lot of this trade imbalance will go away. 

Some of the cast and forged engine parts we buy offshore have been illegal to make in the USA since the 1970's.  The EPA made the air really clean by shutting down steel mills, forges, and foundry's.

While at model contest in Holland I asked a Dutchman:  "Why do you have prohibitive tariffs against things Holland can't make?"
Answer:  "To keep our people from buying foreign stuff."

[Steve Helmick]

Katana...The actual information came to me from a well known model engine company that is out of business. The engine (for example only) cost $12.50 to produce, including packaging. It was probably sold to distributors at $25, who sold it to hobby shops for $36 and consumers at $60. State sales tax (if any) would be added to that. It's a "States Rights" deal... each state writes their own laws, and there is no National Sales Tax. We pay the IRS based on our incomes, and the Feds send some of what the IRS collects back to each state government.

Your example isn't correct. A product made in Brazil for $25 would be sold in Brazil for $100, exported at something in between (let's say $50) and the importer might (or might not!) have to pay a tariff to get the product through customs. I'd bet that 5% > 10% would be pretty normal unless our government had a reason to make it higher or lower.

Protecting vital industries (steel, aluminum, gold, copper, petroleum, food, etc.) are good reasons. We need to be able to make our own stuff if the chit hits the fan. When I was working, I had to buy work boots every now & again. I always wondered how our military would find a source of boots...other than China.    Steve 

[Steve Dwyer]

I fail to understand tariffs. And I fail to understand how they Zero each other out. If tariffs are really all about making us more independent and self-sustaining preventing others from "ripping us off" by instead producing the products on our own, then how will it work? We can't even begin to make the engine now selling for $60.00 here in the states let alone source the materials that we don't have. That $60.00 engine example will be more like $300.00 to manufacture and who's is going to physically build it? We moved manufacturing to the south in the 80s because of cheaper nonunion labor and eventually went abroad. If we tariff ourselves out of foreign available products and we can't afford to make them what's the answer? Thank God for Ebay and used engines...LOL

Steve

[Steve Dwyer]

Is all this just a short term fix? It certainly will help immediately reduce cost of production to some degree if we relax OSHA and EPA regulations in our plants. Many of our neighbors or suppliers operate in sewers with no regard to the environment or the people in the factories. We have to ask, will the benefit of improved profitability be worth the expense of going back to what the LA basin was in the 70s or the steel towns in the east before we realized our environment was being compromised or decided it was important? We still have to live here.

Steve

[Steve Glass]

When all manufacturing was moved offshore also lost was the technical skills. More importantly, also lost was the college courses and the lecturers to train up new technicians.

Steve

[Dave_Trible]

When all manufacturing was moved offshore also lost was the technical skills. More importantly, also lost was the college courses and the lecturers to train up new technicians.

Steve

And the machinery and other equipment for heavy industry.   The costs to move it all again would be astronomical- and the smart guys in the big offices know this will all go away in the next few years.   I wouldn't think the bean counters would suggest they do much- just wait it out.

Dave

[Ken Culbertson]

Many of these companies have been in China for 10-15 years or more.  Two of my customers have moved back and they sold their equipment to China and bought newer equipment when they got back.  China in no longer a friendly place to do business.  I wonder if any consideration has been given to reinstating the investment tax credit?

Ken
   

[Paul Smith]

I remember the old investment tax credit.  One popular scheme was to use it buy a work car that you needed anyway.
The ITC came out in the Jimmy Carter era when a middle class worker who worked overtime, like me, got into the 70% tax bracket and needed relief.  When President Reagan rolled back the top bracket to 35% such schemes were rendered obsolete.

The thing that would save American industry would be the TOTAL abolition of both OSHA and EPA.  Those two overpowering evil empires have driven essential industry offshore.

[Dan McEntee]

Many of these companies have been in China for 10-15 years or more.  Two of my customers have moved back and they sold their equipment to China and bought newer equipment when they got back.  China in no longer a friendly place to do business.  I wonder if any consideration has been given to reinstating the investment tax credit?

Ken
 

    This has bearing on our hobby!! One of the reasons why ARF C'L kits have gone by the wayside, as they have similar problems with supply line shortages and interruptions, labor costs and the like just like we do. ARF companies have come and gone like the wind. I remember Mike Gretz telling me that was a big reason why there was never another run of the Primary Force, as SIG was having problems keeping a quality ARF maker and then the expense of flying back and forth to get a kit designed, approved and then produced. I think Brodak experience the same thing.
  Type at you later,
    Dan McEntee

[katana]

I fail to understand tariffs. And I fail to understand how they Zero each other out. If tariffs are really all about making us more independent and self-sustaining preventing others from "ripping us off" by instead producing the products on our own, then how will it work? We can't even begin to make the engine now selling for $60.00 here in the states let alone source the materials that we don't have. That $60.00 engine example will be more like $300.00 to manufacture and who's is going to physically build it? We moved manufacturing to the south in the 80s because of cheaper nonunion labor and eventually went abroad. If we tariff ourselves out of foreign available products and we can't afford to make them what's the answer? Thank God for Ebay and used engines...LOL

Steve

You've got it in one! Now apply that thinking to a whole manufacturing economy and realise what a problem the US is in for! Unfortunately a capitalist driven economy will chase the lowest cost / highest profit outcome - thats why manufacturing was lost to overseas. Smaller manufacturing can still survive due to lower overheads and reduced chase for high profit in exchange for decent customer service and just making 'enough' money. These companies also tend to borrow less and rely on investment into company financed from profits.
Also the other half of the administration is trying to get shot of migrant / lower paid ethnic workers who are willing to work in the s***ty jobs that Americans have become un-accustomed to doing. If there is no one to do those jobs, pick crops, collect the trash etc. the system collapes - you can be as positive as you like but a college graduate is not going to want to work in the fields for minimum wage!
This is not just a western problem - its Global. As countries become / evolve generally through education, they are less inclined to do 'lesser jobs' prefering to earn more money and pay others to do the s**t they don't want to! Just look how growth in China has occurred once the CPR allowed capitalist market to evolve to supply stuff to the greater world outside China . . . . . . . no different from the USA 80 - 100 years ago when the US supplied the world!

[Steve Dwyer]

Exactly and isolationism should only worsen the cost/availability issue. The mindset it's all going to take time to resolve itself is limited thinking. Prices will never go back down to the previous levels and companies will strive to make profits higher than ever thought possible. Why, because competition will be limited if nonexistent. And who is going to pay wages high enough to keep up with inflation, not the big tax-exempt companies making all the profits. And work force availability that's been well covered above. It's going to come down to a new economy with things we once could afford no longer being available. And you thought balsa prices have risen?? Balsa producers will be a thing of the past, customers will be gone along with the wind farm buyers as well as us modelers. Balsa availability might, however, become a black-market commodity if you're still enthusiastic and deep pocketed enough to build with it. A 40-size model will probably cost over $1K to build, that's pretty steep to risk flying it. It's a pretty glim picture, let's go flying at least while fuel prices remain doable before the price of castor beans go nuts.

[Ken Culbertson]

What we have now cannot survive.  If we don't downsize government and get rid of corruption we might as well just spend ourselves into oblivion and hope the collapse comes after we are dead.  This is a big shift and the earlier Trump gets his way the sooner we can adapt.  The world economy is like the Titanic.  Unsinkable right up to where it sinks.  He sees the iceberg and wants to change course.  The Democrats want to lock him up while they form a committee to draft legislation making icebergs illegal.

[Dan McEntee]

What we have now cannot survive.  If we don't downsize government and get rid of corruption we might as well just spend ourselves into oblivion and hope the collapse comes after we are dead.  This is a big shift and the earlier Trump gets his way the sooner we can adapt.  The world economy is like the Titanic.  Unsinkable right up to where it sinks.  He sees the iceberg and wants to change course.  The Democrats want to lock him up while they form a committee to draft legislation making icebergs illegal.

      Yes, This!! And there is just way too many people out there that just can't grasp the concept that this could happen. They have no concept of what a TRILLION is much less 35 TRILLION dollars in debt! They can't run their households like this, so where do they think the money comes from? Between what they take from us in taxes, the rest is borrowed!! And the printing presses seem to run endlessly!! If they don't like things now, I can guaran-damn-tee them that they won't like the alternative if the country defaults and goes bankrupt. This should have been done 25 years ago when the debt first hi the $1 TRILLION mark.
  Type at you later,
   Dan McEntee

[katana]

Maybe that was true when the US had a manufacturing base and was able to finance the debt via actual real GDP income - hell after WW2 and all of the expenditure associated with that, the US paid off all its debts and became solvent and in profit. That fueled the huge public works in the 50's & 60's whilst affluent lifestyles increased, together with borrowing both public and private! Into the 60 / 70 / 80's and credit spiralled whilst manufacturing declined - anyone remember the pictures of Detroit from back in the day to now - its a ghetto ghost town. Those previous good years can't be rebuilt and the debt won't be paid of by laying off half of the government and destroying peoples lives and communities in the name of 'fraud'. Everyone knows that govt. contracts for everything are badly worded with little protections + the client can't leave well alone - always tinkering which leads to cost increases and never ending timescales. Who believes that military issue toilet tissue is different to regular Walmart TT? No? - so why does it cost $3 a roll and not 30 cents! That is where savings can be made - apply that sort of thinking to the $1T military budget would be a good start! Why does every arm of the military, Army, Navy, Airforce and Marines have a significant number of Bulldozers along with other heavy equipment. Not regular Caterpillar ones, but Military spec. Caterpillar ones that cost $250,000+ each and that get replaced every 5 or so years - some with less than 100 hrs use . . . . . and they are serviced every 6 months regardless of use!
I'm not against cutting govt. waste, but just calling it 'fraud' and disolving whole departments thinking that will resolve the issues, when better and closer accounting would reveal far more benefits whilst preserving some form of normal ancy in daily life.

[Paul Smith]

The Federal government has MANY  unconstitutional and needless agencies that need to be totally eliminated without further delay.

All those established after 1960 for starters.

[Ken Culbertson]

... so why does it cost $3 a roll and not 30 cents!

Bad example.  $2.50 a roll at Walmart today.  The problem with the "departments" is that the only purpose that many of them serve is to provide employment.  Now jobs are a good thing, but it is not the government's job to provide them when they have no purpose.  When 20% of the jobs are government, you have a problem.  I do not share your pessimism as to the American people unable to revitalize the manufacturing sector.  With government off of it's back and demand for US produced goods it will snap back in a heartbeat.  This notion that we "can't" do anything is all that holds us back.  Personally, if someone says I can't do something that only makes me try harder and inside the "MEGA" world that is the most common attitude.

Ken

[Steve Helmick]

My view is that every Government Agency should meet their "Mission Statement" to the very best of their ability. They ARE given a mission statement when they were created by law written by Congress. The Department of Education and Department of Energy don't. The EPA may, but they have written their own laws with no oversight...which should be approved by Congress, but hasn't been in the past. Same for the Dept. of Transport. 

Everything the EPA and DOT has done has radically increased the cost (inflation) of EVERYTHING. Not saying that they haven't done some good things, but at what cost? WAY too many highly paid top managers and mid-level managers and typically they'll claim they can't get their job done because of staff shortages. CLASSIC case of "too many Chiefs and not enough Indians" as we say over this side of the pond.  Steve   

[Steve Dwyer]

So glad I just purchased my car this month and didn't wait longer. I probably save $6000.00 according to the latest prediction on the auto tariff about to go into effect. It's interesting, I saw a map recently where aluminum ore is mined in Tennessee, then sent to Canada to be forged into a cylinder, next sent to Mexico to be milled into a piston then shipped to the Midwest somewhere to become a finished piston before going elsewhere for the final assembly of an auto engine. The chart showed the multiple tariff activity on each trip across our borders. It's hard to comprehend that we can't build the piston here.

[Ken Culbertson]

It's hard to comprehend that we can't build the piston here.

Finally somebody gets the big picture.  By making it here you save BOTH the tariff AND the shipping costs.  So the price to the end user/customer is LESS.  Cheap labor overseas was not the major reason manufacturing left the US.  It was the EPA and OSHA that drove it out.  The irony is that our pollution output into the atmosphere was half of what it became when relocated to China.  Someone forgot to "go figure".

Ken

[Dave_Trible]

I am going to order 5 gallons of nitro this weekend.   I get it from a US company but it's all imported from India,  Japan and China.   The price to my door is $380.00.   After the 2nd who knows...Maybe  $ 470-480- provided it will be available at all.  I think this will last us about three years with what I still have.   Most the castor comes from India but it's widely used  for other things and cheaper anyway so I'll take my chances with that.

Dave

[Steve Dwyer]

Unfortunately, I don't think eliminating or trimming EPA or OSHA restrictions on manufacturing will be significant enough to entice plants back into the states. Nor will the savings in eliminating the cross-border transportation costs and tariff fees still be enough to produce an affordable piston due to the high labor cost within our borders and manpower availability. It's a dilemma. In the meantime, it's not going to happen overnight anyway, and the country can't withstand long term increased higher prices, I'd say this is the real big picture. it's also reasonable to wonder if the present Washington thinking will last the next election cycle and what a mess we will be in then.

[katana]

It's interesting, I saw a map recently where aluminum ore is mined in Tennessee, then sent to Canada to be forged into a cylinder,

next sent to Mexico to be milled into a piston then shipped to the Midwest somewhere to become a finished piston before going elsewhere for the final assembly of an auto engine.

The chart showed the multiple tariff activity on each trip across our borders. It's hard to comprehend that we can't build the piston here.

This factoid sort of disagrees with the 1st point - Bauxite is the only commercial ore of aluminium, and 96 percent of bauxite consumed in the US is used to produce aluminum (metallurgical grade).
However, since 1981, NONE of the bauxite mined in the US was used to make metallic aluminium. US bauxite is instead used for abrasives, high-temperature refractory materials, and other
uses in oil & gas industries.

Canada imports virtually all its Bauxite and due to the excess electrical power available can smelt it cheaply and efficiently - hence why its cheaper. So until the US builds many more nuclear and hydro
facilities you won't have a home produced raw Aluminium product. And seeing as you don't have commercial quantities of Bauxite (US production of ore is measured in 10's of 000 tons) you'll still
have to import ore which will be tariffed in this mad 'world order'

And pistons can be produced in the US - there are several 'performance' piston manufacturers in the US that produce both cast and forged pistons - obviously not at volumes required or as
cheaply as off-shore production. This is what it comes down to - US production costs too much and to bring it back within US borders will require a shed load of capital money investment with a
guarantee of required need for next 25-30 years to warrant the cost. Plus labour costs will still make home grown more expensive against imported!

[Steve Dwyer]

It appears Eagle Alloys Corporation located in Tennessee is a current supplier of 4032 Aluminum used to make engine pistons.

[Bill Schluckbier]

I would say that the messaging from the administration is "interesting" to say the least.  On one side they claim that tariffs will not increase the price to consumers alleging that the importer or original producer will cover the cost of the tariff.  At the same time they also claim that tariffs will incentivize American producers to get back in the game. The only way that would work is if the products subject to tariffs got more expensive allowing the American version to be more competitively priced. I also do not see a reason why an American product would not be priced at the same level or maybe slightly below that of the imported product subject to a tariff.  Either way I believe some things will become more expensive.

The tariffs on autos and auto parts along with those imposed on aluminum and steel are also interesting.  In my view, American auto companies will be hit twice, once when they pay for the sub systems they import (say from Mexico, Canada or other) and again in the raw materials they use.  For example, the US imports about 50% of the Aluminum it uses with most of it coming from Canada.  Newer vehicles (specially EV and hybrids) have a higher percentage of parts made from aluminum so the tariff is bound to have an effect even if the parts are made in the US.  We only import about 20% of the steel we consume so the impact of the steel tariff would be less.  So how does this help the US auto industry?

P.D.  Katana - Thank you for mentioning the part about electricity being crucial to the production of aluminum and hence why Canada can produce it cheaply.  I was going to go over that as well, but no need.  It also helps explain why parts of the US also import some of their electricity from Canada.