Tariffs are not String Theory

But we do have bonded warehouses and complex systems.

During recent congressional testimony, Scott Bessent was unable or unwilling to discuss even simple aspects of tariffs, instead saying, "It's complicated!"

This doesn’t require a Richard Feynman lecture - it’s covered in first-year economics.

The math part is simple—if you add a cost, it must be accounted for in reduced margins and/or higher prices.

We're all familiar with credit card fees and things like "fuel surcharges" on deliveries when gas prices get high. In some cases, the restaurant or material supplier "eats" the extra cost, and in other cases, they pass it on to the customer—pay with cash or come and pick it up to avoid the additional cost.

One part of the US tariff plan that seems to be left out is the levy, payment, and enforcement mechanics. Right now, the bill is presented to the importer of the goods (although it can be deferred, as explained below). The administration and the media keep implying that the government will collect these tariffs from foreign countries, but that's not how ports work now.

Tariffs can be tricky in two ways. The first is the cost of the inputs relative to the overall value of the final product. The second is that companies have "workarounds," including facilities like bonded warehouses, where they can partially game the system.

There has been a scramble to get more goods that left China after the tariffs went into effect into bonded warehouses, particularly around the LA port. These warehouses allow importers to store goods arriving but not officially receive them, which creates a tariff payment obligation. If the tariffs go down or are eliminated, they pay the adjusted rate when they “receive” the goods. (Sources: Flexport & Freightwaves)

Input to Value

Even a 100% tariff doesn't have much impact on many businesses. Acme United $ACU supplies a large part of the market with scissors. Walmart $WMT is a big customer. The landed cost of these units ready for sale (including packaging) is $0.65. They sell in retail channels for $9.99. Acme sells them to Walmart for about $1.30 each.

If Acme has to pay a 100% tariff, it must charge Walmart more, say $1.95 per unit. Walmart will have to consider what it wants to do about it. They have data and analytics to figure it out, but let's say they up the price to $11.99 and do promotions in markets with greater price sensitivity.

In this case, the impact on the business is very manageable. Margins may move around in the short term, but not enough to matter. Disrupting supply chains or starting to build scissor factories in the US is not viable.

Direct imports have a bigger problem. For example, a company offering "cheap and cheerful" wood-burning stoves imported from a high-tariff country would have a harder time surviving—not impossible, but a serious challenge. Many business owners have taken action already: “Luckily, I was able to front-load plenty of inventory before tariffs, which should keep things stable for a while. Hopefully a deal can be made!”

Companies like Massimo Motors ($MAMO) will be in a real bind. They make motorized outdoor products like ATVs, UTVs, and boats priced much lower than the competition. Although these products come from Garland, Texas, they are assembled from subsystems imported from outside the US, and high tariffs may invalidate their business model.

This is a Chinese company in a "US wrapper." They would need to increase the price dramatically. With 32% gross margins, they don't have much cushion. Pressure may mount on their retail distribution partners—Walmart, Lowe's, and Tractor Supply—to drop products with few, if any, components made in the US.

What's the Upshot?

Regarding basic economics, tariffs increase prices, and higher prices dampen demand. This implies slower growth and more inflation (all other things being equal).

We know that the tariff situation is "fluid," to say the least. Most channels have several weeks of inventory. Add to that the stowing of products in bonded warehouses, and we may avoid most (but not all) of the direct costs.

But all other things are usually not equal. There's a budget and tax plan in the works. Some elements could be very stimulating - significant tax breaks for companies purchasing capital equipment and possibly a "zero tax" on the "bottom half" of American incomes. Both are currently in play, as is a potential elimination of the "debt ceiling."

One constant in all this is that inflation will be a real issue. (It would take a deep and protracted recession to impact price levels.). I feel comfortable owning gold, BTC, and hard assets.

Outside of that, it's hard to have much conviction. Rather than chase bad pitches all day, it's better to take the walk, see what Q2 and Q3 look like, and react based on what those results imply for 2026. Things may become clearer, and we'll get some fat pitches.