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What I found dealing with Chinese Factories is that they will reduce the price of goods as much as they can to reduce the impact of tariffs for the customer. Mo

What I found dealing with Chinese Factories is that they will reduce the price of goods as much as they can to reduce the impact of tariffs for the customer. Most factories receive a Government subsidy for all goods that are exported (BOL from shipping lines). In some industries it can be as high as 15% of the price charged to the customer, which allows them to be more competitive or in the event of tariffs allows for price adjustments. Eventually if the tariffs get to a point where there is no profit left then any additional cost will be passed on to the customer and could be passed on to the consumer. I feel this is what is occurring now in the USA. The Chinese are eating the tariffs and will continue until there is no more room to maneuver. At that point US companies will probably eat some of the tariffs by reducing profit. Eventually the consumer might have to pay a little more but that isn't a guarantee. The consumer could luck out and pay what they were always paying. During the 2008 melt down, all our factories agreed to work at cost as long as we continued to buy so they could keep the work force employed. The Chinese are very tough and very willing to do whatever it takes to stay in the game.

toasterlovin 7y ago
The problem is that margins in manufacturing are usually in the single digits. So you can’t really sustain eating a 10% tariff, to say nothing of a 25% tariff, for that long. Money doesn’t grow on trees. You either have to borrow to cover the tariff or pay out of savings. At some point you run out of money or your creditors come to think that you will.
- grizzles 7y ago
  It depends on the industry but margins in manufacturing are often enormous. I once worked in a factory making action figures. We could make a few dozen for under a penny in energy and material costs. Those sold for ~$19.99 each. It turns out that all the cost is in marketing and distribution. And for asian manufacturers the internet era has decreased those costs a ton. They can outsource them to eg. western youtube price arbitragers and focus completely on volume to maximize their government subsidy.
  - toasterlovin 7y ago
    But the action figure factory was not Mattel, right? They were a contract manufacturer that companies like Mattel source from. If they try and reduce their prices to Mattel by 10-25% to counteract tariffs then it’s going to hurt bad, because they don’t have 25% margins. They have <10% margins.

toasterlovin 7y ago

The problem is that margins in manufacturing are usually in the single digits. So you can’t really sustain eating a 10% tariff, to say nothing of a 25% tariff, for that long. Money doesn’t grow on trees. You either have to borrow to cover the tariff or pay out of savings. At some point you run out of money or your creditors come to think that you will.

grizzles 7y ago
It depends on the industry but margins in manufacturing are often enormous. I once worked in a factory making action figures. We could make a few dozen for under a penny in energy and material costs. Those sold for ~$19.99 each. It turns out that all the cost is in marketing and distribution. And for asian manufacturers the internet era has decreased those costs a ton. They can outsource them to eg. western youtube price arbitragers and focus completely on volume to maximize their government subsidy.
- toasterlovin 7y ago
  But the action figure factory was not Mattel, right? They were a contract manufacturer that companies like Mattel source from. If they try and reduce their prices to Mattel by 10-25% to counteract tariffs then it’s going to hurt bad, because they don’t have 25% margins. They have <10% margins.