There's a New Tariff in Town

I did not want to write about tariffs this week.

I was hoping that the tariff announcement would be pushed off - again - and punted for another time. That all the nations in the world would work out a universal agreement, that each country gets a little taste of taxes, and business could move on as it has in the past.

Writing about tariffs is like betting the under. In sports betting, when you bet the under, you are wagering that the combined, total, final score of a game will be lower than what Vegas publishes. It’s called the “Over / Under”.

What one is doing when they bet the under is rooting against the game. You want to see missed shots and turnovers. It’s a negative emotion bet, and you end up feeling bad when something good happens. In other words, it’s not enjoyable.

Neither was yesterday’s news about the tariffs, but it’s all consuming in the business world and I have a view.

We didn’t get another delay, we got the under.

We also got tariffs and bad math.

In 2000, at the beginning of the invasion of Iraq, Defense Secretary Donald Rumsfeld famously said:

I thought about this quote quite a bit this week, and again this morning as I digested the tariff news.

• Known knowns: There’s a new tariff in town. The tariff threat is finally here and we can get past the worry stage and set strategy on what actually happened in the Rose Garden speech.

• Known unknowns: The internet does not enough bandwidth or storage for the Known unknowns this morning, but let me start with a few:

  • How much of these new tariffs will be passed on versus absorbed?

  • Which retailers, distributors, and importers have leveagre to use this to their advantage?

  • What will the employment picture look like next month, quarter, and year?

  • Is this a negotiation stance or a permanent thing?

  • What will my morning coffee cost? You get the idea.

• Unknown unknowns: How about the tariff out of China? I mean, nobody knows!

  • Is it 34%, comprised of 10% global and 24% China?

  • Is it 54%, comprised of two previous 10% tariffs plus 34%?

  • What about the 5% - 15% tariffs from the first Trump administration, are those still in place?

  • What about products made of steel and aluminum?

  • What about penalties on countries for purchasing Venezuelan oil?

There’s money to be made in the Unknown unknowns - just nobody knows how to wager on this….yet. But trust me, companies I am speaking with are thinking long and hard about Unknown unknowns.

By now we are aware that the reciprocal nature of the new tariffs is thin on concrete numbers. Are they “made up”? No, I won’t go that far, but it’s certainly notional. The administration did not do a great job explaining this. Another sloppy example of implementing the administration’s strategy.

Regardless of where you stand on the political spectrum, you have to admit there wasn’t a great deal of proof-reading within the fine print.

For example, the Heard and McDonald Islands were hit with a 10% reciprocal tariff. This is an unpopulated island in the Indian Ocean inhabited by penguins, not people.

Even countries that are inhabited could not escape the tariff wrath. Vietnam took a lot of actions the past few months to appease this administration and still couldn’t avoid a new 46% tariff. They cut duties, approved Starlink, and continued development on a Trump golf course.

Well played, no doubt. Yet, not enough.

The entire southeast Asian region was hit hard - Vietnam 46%, Cambodia 49%, and Myanmar 46%, to name a few.

I’ve spent the last 10 years of my career diversifying supply chains and manufacturers to reduce the political risk associated with doing business in China. This morning, one has to ask, what is the incentive of moving out of China? The work it takes to set up shop in a new country, building factories and training a new work force, establishing new supply chains and re-costing freight routes…is it worth it? If China is still the low cost supplier, and today’s tariffs on China are not substantially higher than neighboring countries, why move?

Couple that with the Unknown Unknowns - we do not know what will happen next. So why change course? If you are in an industry that is not likely to re-shore manufacturing - and there are quite a few! - what is your incentive to invest in, say, Thailand (36%) when you can focus your efforts on increasing efficiency in Xaimen?

The tabloid and grocery store, check-out aisle, magazines are quick to produce “What’s In and What’s Out” lists every January. Consumers now have a new list associated with spending on their favorite brands:

• Out = Brunello. In = Napa Cab.

• Out = Kerry Gold. In = Land O’Lakes.

• Out = Modelo. In = Miller.

• Out = New Mercedes. In = Used cars.

What’s truely in, the real winners today, are companies with strong balance sheets who can wait and see where the situation ends up. Importers will still import - now probably more from China than before. They will pass along the tariff to the best of their extent. Walmart and Target, and other retailers will begrudgingly raise prices. House brands will be EVERYWHERE!

Yet, for many brands, the strategy will not change, in fact, things might get easier. The tariff tide will lift all prices, so why not stick with what is working, where operations are efficient and quality is consistent, and wait to see what happens next.

Wall Street is sending a signal that this could be all hat and no cattle, that it will be negotiated down and chiseled at until a happy equilibrium is met.

Meanwhile, the Tariff Sheriff will maintain law and order, keep out the ruffians, and hopefully settle down an administration still looking to do deals.