Understanding Tariffs like a 18 year old

In under 3 minutes, you will understand tariffs

Everyone is talking about tariff - either writing or making videos. Having gone through most of the context, I felt that no one was clearing the basics (my friends did through their video - link at the end). So, even though people are reading about tariffs every day, they are not understanding much.

Here is my newsletter to help you understand how tariffs impact companies at the ground level. Tariffs can feel a bit abstract until you see how they impact real companies on the ground. So let’s break it down in simple terms, with real-world-style numbers and examples of what happens when tariffs go up for a company. Hopefully, after reading this, you can make better investment decisions.

I will be sending another newsletter this week itself, where I talk about my new investments in the stock market (and some exits).

What is a Tariff?

A tariff is a tax imposed by a government on imported goods. The goal is to:

• Make imported goods more expensive.

• Encourage people to buy local (domestic) alternatives.

• Generate revenue for the government.

Let me explain with an example.

An-Level Example: Indian Company A Imports Steel

Let’s imagine an Indian company, “Abhinav Mishra Pvt Ltd”, that makes hand tools (like hammers, spanners, etc.).

They import steel from China to make those tools.

🔹 Normal Scenario (Before Tariff Hike):

• Steel cost (imported from China): ₹50,000 per ton

• Tariff on imported steel: 10%

• So total cost per ton = ₹50,000 + ₹5,000 = ₹55,000

Metro Tools buys 1,000 tons/month, so:

• Total monthly raw material cost = ₹55,000 x 1,000 = ₹5.5 crore

What if the Indian Government Raises Tariffs?

Let’s say the government increases the tariff on imported steel to 25% (to promote Indian steel producers like Tata Steel or JSW Steel).

🔹 After Tariff Hike:

• Steel base price = ₹50,000

• Tariff = 25% of ₹50,000 = ₹12,500

• Total cost per ton = ₹62,500

• Monthly cost for 1,000 tons = ₹62,500 x 1,000 = ₹6.25 crore

Monthly cost increased by ₹75 lakh!
(That is Rs 9 crore more per year)

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What happens to ‘Abhinav Mishra’ now?

1. Profit Margin Falls:

   • If they can’t raise the selling price, profit gets squeezed.

   • Let’s say they were making Rs 1.2 crore/month in profit earlier — now it may fall to Rs 45 lakh.

2. They May Increase Prices:

   • To maintain profit, they may hike tool prices.

   • But if customers switch to cheaper alternatives, they may lose sales.

3. They May Switch to Local Steel:

   • If domestic steel is cheaper now, they might shift suppliers (which is what the government wants).

4. Stock Price Impact (if listed):

   • If profits fall and margins shrink, investors might get worried.

   • Stock may drop.

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Other Real-World Examples:

Example 2: A US Furniture Company

• Company imports wooden chairs from China at $50 each.

• US imposes a 25% tariff.

• Now the cost is $62.50 per chair.

• They either raise price (and risk losing customers) or accept lower profit.

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Reverse Scenario – Benefit to Local Companies

Imagine Tata Steel or JSW Steel is selling steel in India.

• When tariffs on Chinese steel go up, Chinese imports become costlier.

• Buyers shift to Indian steel.

• Demand increases.

• Tata Steel increases sales and may even raise prices a bit.

• Profits and stock price can go up.

To Sum Up

For more such content, please subscribe to my newsletter. I will be sending another newsletter where I talk about my new investments in the stock market (and some exits).

Here is a video by my friends on the same topic - Do subscribe to it if you liked the video -