During the pandemic, as component and shipping costs surged, OEMs looked for alternatives to price increases. Surcharges were rolled out by one manufacturer, and the others quickly fell in line. Surcharges were represented as temporary increases that would be reduced or removed once COVID related price spikes had normalized, although some manufacturers continued charging them long after shipping and commodity prices had returned to their historical run rates.
OEMs embraced surcharges for a multitude of reasons
- Flexible – easy to adjust up (or down 😉 ) as production costs changed
- Stealth price increases – these additional fees allowed the manufacturers to continue advertising reduced MSRPs which were enticing to consumers
- Placated shareholders – along with a significantly reduced spend on rebates and promotional financing, surcharge income mostly flowed directly to the bottom line
- Reduced dealer margin – similarly to vehicle freight, manufacturers knew that some dealers would just absorb these additional costs in lieu of adding one more line item to a customer’s bill of sale
So, for an article with a headline about tariffs, why am I discussing pandemic surcharges? Because tariffs will be the next surcharge.
Around the globe, many different types of taxes are utilized to fund governments.
United States Tax Revenue Sources:
- The U.S. government derives a large portion of its revenue from individual income taxes (the largest source), payroll taxes (used primarily to fund Social Security and Medicare), corporate income taxes, and excise taxes (on specific goods like alcohol, tobacco, and fuel).
European Union and VAT:
- In the European Union, Value Added Tax (VAT) is a primary form of consumption tax used by member countries. It is similar in function to a sales tax but is applied at each stage of production and distribution, not just at the point of sale. Many EU countries either do not have separate sales taxes or use VAT in its place.
China:
- The government uses a VAT system as a major source of revenue, alongside corporate income taxes, personal income taxes, and other levies such as tariffs and land-use taxes.
Globally, tariffs comprise a small percentage of total government revenues.
Governments use tariffs for several reasons:
- Protectionism: Tariffs can protect domestic industries from foreign competition by making imported goods more expensive. This can help domestic industries grow and create jobs, but it can also lead to higher prices for consumers.
- Revenue: Tariffs can be a source of government revenue, particularly in countries with low tax rates or underdeveloped tax systems.
- Retaliation: Tariffs can be used to retaliate against other countries that impose unfair trade practices, such as dumping (selling goods below cost) or subsidizing domestic industries.
- National Security: Tariffs can be used to protect industries that are deemed essential to national security, such as steel or pharmaceuticals.
However, tariffs can also have negative consequences, such as:
- Higher prices for consumers: Tariffs can make imported goods more expensive, leading to higher prices for consumers.
- Reduced trade: Tariffs can lead to trade wars, where countries impose tariffs on each other’s goods, which can harm economic growth.
- Inefficiency: Tariffs can protect inefficient domestic industries from competition, which can lead to higher prices and lower quality goods.
While there are pros and cons to tariffs, they are generally seen as an alternative form of taxation. Tariffs are typically collected at the time of customs clearance, when goods are entering a country. This means that the importer, usually a company or individual bringing the goods into the country, pays the tariff to the customs authorities.
The specific timing can vary depending on the country’s customs procedures and the type of goods being imported. However, the general principle is that the tariff is paid before the goods are released from customs and allowed to enter the domestic market. Tariffs are rarely paid for by the manufacturer or exporter.
During 2023, about $3.1 Trillion in imports hit American shores. Approximately 13% of that came from China. In 2015, approximately 22% of imports to America came from China. The data shows that while the total amount of imports has been increasing, China has been losing share. Some of this reduction has come as importers look to make purchases from countries with lower labor costs, while also attempting to work around the increased tariffs applied to Chinese goods.
When you look at the powersports lineup, many of the available vehicles are either wholly produced overseas, or have a significant amount of components that are manufactured in other countries, and then shipped to America for final assembly.
America has trade agreements in place with many of the countries around the world. These agreements fix the rates paid between countries, and in many cases they prop up specific industries in their host country, ones that would not survive if they had to compete globally.
While tariffs impact the MSRP of almost every motorcycle, ATV, and UTV, it’s a small portion of the total price, and it’s been a predictable number. If the new administration is unable to extract concessions from our trading partners and we choose to enact large tariffs on short notice, this could have a dramatic impact not only on the vehicles we sell, but on many of the parts and accessories that dealers stock and sell.
Since any new tariffs will be paid for directly by the importers, I have no doubt that we will quickly see the pandemic surcharges reactivated with a new name, tariffs. Just like as we saw during the COVID era, vehicle invoices will include an additional line item for these costs. Justification for these increases not being included in the vehicle’s MSRP will be the same as last time. Manufacturers will make statements such as “these are direct costs, however they may only be temporary. As these costs fluctuate, we will make ongoing adjustments”.
While the impact of these new fees will be easy to see with vehicles, when it comes to individual parts and accessories, I expect we will see the retail price increases. It’s not as easy for an aftermarket distributor to levy surcharges, so prices will just increase.
While one use of tariffs is to promote the use of local resources and labor, the reality is that America no longer has the capacity (both equipment and manpower) to produce everything that we need. And, even if we could make some of these items, the costs of labor in this country would make them unaffordable.
The new administration is going to be impulsive and it’s almost impossible to predict which countries will be targeted by new tariffs, and how high they will be. The only thing I am certain of is that these new tariffs will increase the prices of the vehicles and products we sell. With many of our customers stretched thin financially, increased costs might not bode well for some dealers.
#Powersports #Tariffs #Surcharges #America #China