May 2025 Update
Here we are, 4.5 months into 2025, and it’s been a tumultuous ride so far. We’ve had tariffs threatened, instituted, and rescinded; we could still see them returning. Everything we’ve seen so far has been indicative of a pause on tariffs, and as I write this, the only deal that seems to have been done is between the UK and the US. That deal was announced, but the details remain to be fleshed out. For now, the US and China have agreed to pause tariffs on both sides and are negotiating a more concrete deal.
The truth is that no one knows where we’re headed on that front. In the meantime, the pauses and softer tone have seen things move higher since the initial announcements on April 2. I would note that there are still lingering issues aside from tariffs in the market, and the sentiment has fluctuated significantly over the past 5-6 weeks. Regardless of how these tariffs end up, let’s do some math around the tariffs, or let me explain why that $100 item shouldn’t jump to $110 with a 10% tariff, and why this might actually be positive for US companies, and bad for US consumers.
First, these tariffs are essentially an import tax. That tax is paid for the goods as they are imported, and I’m using the 10% figure because it makes the math easy to follow and is the baseline that the US has said everyone will pay. Let’s base this on a $100 item you see on the store shelves for that price. About 60% of the consumer price takes place after the port-of-entry. That means the $100 item is at $40 when it comes through the port of entry. From there, there are other shipping costs, warehousing, and, of course, a profit margin, among other things, to bring the consumer price to $100. That 10% tariff only applies to the $40; in other words, the cost in our example is $44. Theoretically, that item should rise from $100 to $104 on a dollar basis. This is where the negotiations will take place, and from a political and public image standpoint, things get interesting. Are companies going to print a tariff charge on the receipt, putting that as $4, or will they instead make that price $110 and have the tariff charge as $10? Similarly, will the companies charge that $110 and increase their margin, or will they only pass along the actual increase? This is pure conjecture on my part, but I would guess that many companies end up charging $107 or $108 for that product now, giving consumers the impression that the tariff is 10%, and they’re eating part of that increase.
This pricing and the way the tariffs impact it are why I think this is a net positive for many US companies. They will increase their margin here by 3-4% and give the impression to consumers that they are doing all they can to help.
I have another quick comment on tariff pricing and whether companies should include that charge as a separate line item. As a consumer, I’m mainly in favour of that. If the tariff costs are shown separately, the companies will be more pressured to remove them when negotiating trade agreements. If they are not broken out, those prices increase, and there is less likelihood that they will be reduced if new deals are implemented.
Where do we go from here? Of course, this is the million-dollar question, which isn’t easy to predict. I have spoken to several of you over the past weeks and said that I think we will finish the year positively, and I stand by that. I wouldn’t be surprised to see more volatility this year, and we could return to the lows we saw in early April. The tariff and trade issue is increasingly like the “Boy Who Cried Wolf”, with a few problems. First, it makes believing the announcements and taking investment actions based on these extremely difficult. Second, in that story, the wolf shows up at the end. This means that we both have a hard time believing the lie that the tariffs are coming and here to stay, but because we suspend this belief, it also means that we face the full brunt of them! Regardless, though, having these enormous swings in the market based on one individual's comments and thoughts is just plain dangerous. While the volatility we saw in early April is not unprecedented, what was unprecedented is the idea that this was entirely based on a loosely fleshed-out policy announcement. Likewise, from all reports, the rescinding of the tariffs was based on a conversation that morning in the Whitehouse. This type of action should give investors no confidence in the short term, and it means that we all need to look at things from a much broader view. We have to remain focused on the longer-term outcomes and do our best to avoid being swayed by these short-term gyrations.
Until next time,
Vic
