There seems to be a lot of misinformation being spread about import tariffs.  OK, maybe it’s better to be direct and say lies.  Either the president is misinformed, stupid, or lying when he explains that tariffs are a tax on China.  They are not.  Tariffs are a tax paid by the importer of goods.  Tariffs are paid when the products cross into the United States at a port of entry.   Let’s walk through an example.

A lot of the things sold at Walmart are manufactured in China.  For our example we’ll consider a bicycle for a child.  Walmart purchases said bicycle from a producer in China.  It then ships it to the United States, typically on a container ship, likely arriving in Los Angeles, the largest port in the US.  From there it’s likely to be shipped by rail or truck to a distribution center then to a store where said bicycle is sold.

First, let’s consider a tariff free world.  To simplify things we’ll say that Walmart pays the Chinese manufacturer $100 for the bicycle.  It’s not unusual for a retailer to sell at a 200% mark-up.  In this case Walmart would sell the bicycle for $200 (more likely $199.99).  The $100 dollar difference is not profit.  It covers a lot of things, among them the cost of shipping to get the bicycle from China to the store, the cost of the building, including maintenance, and other necessary things such as the employees who work for Walmart.  In short, a portion of the price covers the purchase of the goods from the manufacturer, the costs of doing business, and hopefully a bit of profit as well.

Tariffs, on the other hand, make everything more expensive.  Keep in mind that tariffs are paid when a product enters the United States.  In our example it’s when the bicycle arrives at the Port of Los Angeles.  The current tariff on goods from China that went into effect today, April 9, 2025 is 104%.  What this means is that Walmart, the importer, pays the tariff to the United States government when the bicycle enters the US.  The tax is $104 at the current tariff rate.  This means that the cost to Walmart of this bicycle is $204, $100 paid to the manufacture and $104 as a tax.  Using the standard 200% mark-up Walmart price the bicycle at $416 (yeah, I know, it’s Walmart so probably $419.97).  The cost to the end consumer has more than doubled.  On the surface this looks good for Walmart.  Its costs for things like transportation, their employees and such are the same in both cases.  Walmart will earn a greater profit in the tariff case, but all is not good.

So what is wrong with this?  Many, many things.  First is that it increases the rate of inflation.  This product, the bicycle now costs more than twice what it did without tariffs.  Let’s consider a hypothetical parent with two young children.  Said parent planned to buy and give each child a new bicycle for their birthdays.  Now, with the doubled price only a single bicycle is affordable so the older child gets a new bike and the younger a hand-me-down.  The impacts start to ripple from there because it’s not just our parent who is effected, it’s every parent purchasing a bicycle.  We could say “so what”, so what if a factory in China makes fewer bicycles to sell to Walmart?  To start, people in China buy US products, albeit fewer than we buy from them.  If the bicycle manufacturer cuts staff by half then fewer people have money to make purchases.  The impacts may start at a bicycle factory, from there they impact the entire supply chain.  The shipping company that brought the bicycle from China needs fewer ship workers because less freight is being transported.  The Port of Los Angeles needs fewer dock workers to unload freight.  It goes on from there….  Fewer truck drivers, fewer store workers, on and on.  It becomes a spiral.  And when people lose their jobs they have less to spend.

Let’s throw out one more example: the purchase of a car.  We have two considerations here.  The first is obvious.  A tariff increases the price of a car, making it less affordable.  The second takes a bit of explanation.  Economists consider what they call “disposable income“.  The short and simple explanation is that disposable income is the money that’s left over after one pays for all required expenses, things like shelter, food, and taxes.  Less disposable income means fewer purchases of things that aren’t necessary such as a new car or a better TV (OK, many people just use a credit card and spend what they don’t have.  That’s a discussion for another time, yet it still applies here since at some point payments need to be made on the debt).  Tariffs impact not only things like bicycles.  They are also being applied to food and other necessities.  A good portion of our fresh fruit and vegetables come from Mexico and Central America.  Tariffs make them more expensive.  I’ve heard “just buy American”.  That can work for some things.  It doesn’t work for bananas.  We don’t have the climate to grow them.  The same is true for coffee.  An increase in the costs of the basics reduces disposable income so not only is the car more expensive because of tariffs, it’s now less affordable because of the reduction in disposable income.  When the car can’t be bought it means that workers lose their jobs.  It cycles from there.  Sales reps won’t be selling cars.  Parts makers lose business.  On and on….

Is it any wonder why Wall Street is freaking out?