Admire the Salesman

I really wanted to write my next post on cities, but something has been bugging me. Donald Trump knew that he couldn’t impose a national value added tax – VAT in European countries and GST in Canada. There would have been an absolute uproar. So what has he done? He has just made the largest US tax grab in history and sold it as tariffs paid by other countries. Really, we need to admire the salesman Trump.

Cost of Tariffs to Americans

The US government claims to have collected US$150 million from tariffs from February to July. July alone garnered over US$29 billion. Let’s be very clear. Every penny of this has been collected from Americans or American companies. In Canada, the federal government’s GST generates approximately C$46.0 billion annually and represents about 10% of its receipts. The US population is about 10 times that of Canada’s. Based on current trend lines, the US will collect US$460+ billion from individual Americans and American companies. More likely, the US tariffs regime will generate about 5% of its federal government receipts or US$250 billion.

Some exporters from around the world may have temporarily tempered pricing. And US importers of everything from T-shirts to aluminum may be holding back on price increases temporarily. Temporary because this US president is famously mercurial and trying to find a logical pattern to tariff rates has been impossible.

But Price Inflation is Coming

In the short run, anticipated consumer pricing increases will hit about 2% and will cost the average American household US$2,400 every year. There will be particularly sharp price increases in:

• Shoe prices – up 40%
• Clothing – up 38%
• Fresh produce – up 7%
• New car prices by up $5,800

So, hardship for America’s working poor and less buying power for the average American family.

And For the Wealthy American

Luxury goods are largely imported from Europe or the UK. Carrara marble, Italian-made kitchen cabinetry, Louis Vuitton, Prada, Brunello Cucinelli, Loro Piana, Dior, or maybe you fancy a Rolls-Royce. What is the impact?

A lady’s virgin wool and mohair coat from Brunello Cucinelli US$11,300 plus 15% – US$13,000

A Loro Piana Sebring coat from Italy – US$5,420, add an additional 15% tariff – new price: US$6,200

A 2025 Rolls-Royce Ghost – US$375,000, add an additional 10% – new price: US$412,500.

Why would Prada or any of these other luxury brands even think of offering a price discount? Does anyone seriously believe that the consumer that buys these luxury goods will look for an alternative? He or she will just shrug their shoulders and pay the new “Sales Tax”. The tariff on European wines remains to be settled. No doubt that it will impact lower value bottles, but the wealthy will continue to purchase super Tuscans, Château Rothschild, Chateau Pétrus,and other highly priced, highly valued European wines – Regardless of tariff rates! Status symbols unmatched by anything from the Napa Valley.

The Rush

When the Canadian government first introduced the GST it added about 1.5% to the consumer price index – a one time event. The impact of tariffs on US inflation will be similar in that it will occur in the first year following imposition. On the horizon, the midterms. So, the US administration has a small window to get these tariffs settled. Now if US consumer prices could reflect all of the increases related to tariffs by say December, maybe the political impact of this disguised tax grab dissipates.

Admire the Salesman

Trump has sold tariffs as a tax on foreign governments and the great unwashed electorate seems to have bought the sales pitch. The pitch will falter when the reality that the average American family has lost US$2,400 in spending power. The gamble – the price increases will be forgotten by the time of the midterms. You have to admire the salesman!