Trump says retailers should 'eat the tariffs.' Good luck with that.

Time of India

6 days ago

COMPANIES CAN'T DENY REALITY. Maybe I've misunderstood how retail businesses are supposed to operate, but I was always led to believe that the cost of goods should not exceed actual revenues.
Yet that fundamental principle is essentially what President
Trump
is ordering
retailers
such as Walmart to abandon as they grapple with the 30 percent tariff on goods from China, as well as various duties on items from Vietnam, Canada, Mexico and other major sources of products for the U.S. market. Walmart should "eat the tariffs," the president demanded recently on Truth Social, his social media site.
Then we have the head of the Small Business Administration, Kelly Loeffler, who on a visit to a factory in Georgia pronounced that "the top concern is not tariffs," implying that a 30 percent tariff will free it from evil Chinese communist suppliers. The chief executive of the company wasn't quite buying it: "Manufacturing is a global supply chain," she noted. One that is now more costly.
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Walmart seemed to have offended Mr. Trump by announcing that it would have to raise some prices given the chaos he has caused. But it's only fair that a company would warn its customers of price increases and explain the reasons for them. And in the end Walmart, like other resellers, will indeed eat some of those tariffs: According to UBS Global Wealth Management, a 10 percent tariff translates to a 4 percent price increase at retail.
For Walmart, which sources many of its goods from Asia and particularly China, there isn't much wiggle room given how the company operates. From the beginning, it has won customers and generated profits by keeping costs at a minimum -- including labor and overhead -- and by squeezing vendors. Any ripple in that equation and the business model doesn't work for the company.
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A 30 percent tariff isn't a ripple; it's a wave. So Walmart has warned it may raise prices, as has another big retailer, Target.
Which of course doesn't play in the White House. Mr. Trump loves to remind us what a great business mogul he is. If that's true, he should understand what happens when expenses exceed revenue, which happened in several of his casinos. (In total, he's filed six bankruptcies for his businesses.) Yet his demand is that big retailers can, or should, absorb enormous cost increases by dialing back in other areas or changing their sourcing.
One of these retailers, Home Depot, has said it will do something like that. The company's founders include prominent Trump backers, so you can view the move as partly political. But it's difficult to see how its earnings won't fall.
For one thing, home building is stalling, in part because homebuilders and consumers are freaked out about the future. In addition, contractors who do go to Home Depot for supplies might find some products missing, because the company has said it might not stock heavily tariffed products. Consider that upward of 70 percent of imported softwood products come from Canada -- and the United States has threatened to raise the country's current 14.54 percent tariff. For landscapers, some 80 percent of imported potash, which is used in fertilizer, is produced in Canada. Tariffs on aluminum and steel products sit at 25 percent.
Home Depot's supply chain reveals how convoluted the question of national interest can be. That Cub Cadet riding lawn mower, which is made in the United States? Some of its parts are imported. Ryobi mowers, which are made in America, could gain more store space -- but Ryobi is a Japanese company (though its U.S. power tool and mower business is owned by Techtronic Industries of Hong Kong).
Big companies and their allies seem to be afraid to call tariffs and the resulting price increases what they are: a tax on imported goods, paid by the importer. Denise Dahlhoff, the director of marketing and communications research for the Conference Board, a business group, recently recommended that executives should avoid the word "tariff" and use more "neutral terms," such as "sourcing cost" or "supply chain cost."
Think again, Ms. Dahlhoff. Most grown-ups can handle the word "tariff." The avoidance approach assumes that consumers are idiots who can't figure out that they are paying a tax. Wordplay is a wrongheaded strategy, though it jibes with the general obeisance that big businesses have been paying to Mr. Trump -- a tactic that has yielded them nothing.
Small and medium-size businesses, on the other hand, live in the real world -- some have even sued Mr. Trump over tariffs -- and have no choice but to pass on the Trump tax to customers. They are making this pretty clear by adding surcharges to goods and services and informing their customers of the source. One example: A Danish furniture store in Westchester County, N.Y., recently posted signs explaining that its imported designs would be subject to a price increase of up to 10 percent as a result of the tariffs. Then again, the Danes don't have to deal with Mr. Trump. (Oh, wait: Greenland.)
In one of the tales in Jonathan Swift's "Gulliver's Travels," we encounter the Houyhnhnms, a race of talking horses that are incapable of lying and don't understand why humans need to say "the thing which is not." In today's irrational America, companies are afraid to say the thing which is, for fear of enraging the thing that is making their businesses more unpredictable and less profitable.
Swift was writing satire. Business leaders who deny the realities of the tariffs are engaging in self-satire. And it will be self-defeating.