The Great Misconception of the “Tariff War” and its Positive Effect on Industrial Real Estate

We have all recently heard in the media about the looming Tariff war between the US and China, and how it will cause a massive recession and ultimately lead to the downfall of America.  To say that the assessment made by the media outlets is an exaggeration, would be the understatement of the century. It seems that we are being fed with a very small amount of accurate information, but ultimately, we are not given all of the facts and there is a tremendous amount of important detail left out.

To understand what the 25% tariff or duty increase really means for American consumers we need to understand how the tariff classification system works. The way that the cost of a tariff fee is calculated is by using HTS Codes (Harmonized Tariff Schedule Codes). The HTS codes were developed by the World Customs Organization (WCO) and are important because it not only determines the actual duty/tariff rate, but it also keeps accurate records of international trade information and trends for over 200 countries worldwide. After listening to many radio news and talk shows, and speaking to friends and colleagues, it seems that the vast majority of people believe that this will be a 25% increase to the consumer on the total cost of a product. What is so misleading is the fact that the proposed 25% duty increase is only on selected imported goods, and it is only a 25% increase on the duty, and not the total cost of the imported product. After spending over 25 years in the shipping business and primarily focusing on international trade, it is obviously something that I quickly understood, however for someone who doesn’t know the difference between a tariff and traffic, the lack of explanation by the media outlets causes an unnecessary panic.

As a tool to further understand how the HTS codes actually work, let us look at the way an Importation Clerk or US Customs Broker would use these codes to calculate the duty on an imported pair of ladies leather shoes imported from China to the US. Duty fees are always calculated using the LCOG or landed cost of goods, which include the cost of the product itself, any inland transportation in China to get the product to a shipment point, and any associated ocean or airfreight fees. We will use a LCOG cost of $26 USD for this process. An important thing to remember when talking about imported product, or really any products being sold by a retailer, the LCOG or wholesale price, is usually between 19% to 28% of the retail sale price.

  • Using the HTS Code for ladies’ leather shoes (HTS#64029990) the duty fee is 32% of LCOG.
  • Prior to the proposed Trump increase, the duty fee would be the LCOG of $26 USD multiplied by 32% for duty fee of $8.32 USD.
  • If we calculate a 25% increase on the duty of $8.32 USD, the increase would be only $2.08 USD.
  • So, the overall LCOG increased from $34.32 USD to $36.40 USD.
  • If we now figure in that the LCOG is 25% of the retail price of the product, meaning $137.28 or $145.60 – the total difference in consumer cost is just over 4%.

What all of this really means is that the “Tariff War” is essentially war of ignorance and misleading facts. Who can say what effect this politically bias, and inaccurate information will have on the future of real estate. What has been a positive sign for industrial real estate in the NY Metro area, is that the Port of New York and New Jersey has moved up a position from the 3rd largest US port in terms of volume, to the 2nd largest, due to the billions of dollars spent on raising bridges and deepening shipping lanes. What we know is that the money and demographics are here on the east coast. For years, as a means for expedience, many vessels coming out of Asia would be docked on the west coast and have their containers transferred onto rail cars bound for east coast destinations. This MLB (mini land bridge) transfers were extremely expensive but saved shippers in some cases up to 10 days of transit time. Now with the wider Panama Canal, the ability to accept larger vessels into the NY Harbor, and the purchasing needs of the North East, it is hard to predict anything but continued record low industrial vacancies and property costs to stay strong.