In the mean time, here is how the business imports currently works:
A small business orders $100,000 of widgets from China.
The tariffs are 50%, easy math, the company owes $100,000 to the supplier, and 50,000 to US customs.
The business has to pay prior to getting the widgets released, or pay by owed date.
If they don't pay, most likely end of business, bankrupt.
Does the business all of a sudden have enough working capital to pay the US tariff?
The predominant answer is no, so needs an additional line of credit to pay the tariff.
OK, so the business gets one. . pays the tariff, and gets the widgets.
The next question is if the small business has enough product pricing power to pass that 50% increase on to customers?
Lets say gross margin is 20%, so prior to the tariff:
Pre Tariff Math = $125,000 Sales - S100,00 Cost of Goods Sold = $20,000 Gross margin to pay fixed overhead costs
Post Tariff Math = $175,000 Sales - $150,000 Cost of Goods Sold = $20,000 Gross Margin to pay fixed overhead costs.
175,000 / 120,000 - 1 = 40%
Now the cost of product is 50% higher, so in order to get the same margin dollars to pay for US overhead expenses,
the sales price must rise 40%. .
The only way for sales to remain at 40% higher, is for all competitors to raise prices 40%,
and for the demand being inelastic, meaning that people will buy the widget regardless of price.
However, demand being inelastic is highly improbable, so
1) the consumer will continue to buy with 40% product inflation?
2) reconsider the purchase and delay / not buy any more?
That is how the Great Depression happened.
Good Luck to us!
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