Strong comparisons can be made between elasticity in price management on one hand, and how elasticity was used in President Trump’s tariff setting math on the other. In this piece, we’ll review relevant dynamics and describe key implications for distributors and answer questions such as:

• Which tariffs are more likely to remain in place long-term?
• How can distributors vary their reactions to specific tariff instances?
• What approaches can distributors take in implementing tariff-driven pricing actions?

The insights here may help you plot your course for navigating what is sure to be a choppy next few months as B2B supply channels await calmer waters.

Price Elasticity in Price Management

In the pricing world, we seek to gauge how elasticity varies across different channels, products and customer markets. Some products are more competitive, and some customer segments are more likely to shop around. We price accordingly, predicting stronger volume responses in more sensitive markets.

In the pricing world, we also realize that elasticity in a given market varies across the demand curve. The curve is steeper (demand is more elastic) in the range of prevailing market price levels. For example, if a low price is raised, but if the new price is still kept significantly below that market range, then volume is less likely to respond: most buyers who are interested in the product will buy at both the pre- or post-price hike levels. More significant volume losses are projected only if the hike moves the price into the market range.

Premium – Who Wins and Loses in the Tariffs New Normal? — April 4

Price Elasticity in the Trump Tariff Calculations

The Trump tariff calculations assumed that demand for the imported goods had an elasticity of 4 to import prices: for every 4% increase in import prices, the markets would respond by a 1% drop in imported quantities. This 4% rate was reportedly chosen because certain research papers analyzing trade tariffs of different goods across different countries found that the elasticity of imported quantities could be as high as 4.

Such widespread assumptions can be tricky. The assumed singular value may be unnecessarily high in some cases, or too low in others. Here is more color:

In the case of some goods, the elasticity of demand may be higher. This might involve goods that are widely produced in many countries, or goods for which production can be moved easily. If acquiring goods from suppliers in country A means paying higher prices, significant volume will quickly shift to suppliers in a different country, or production may be moved to the US altogether. On the other hand, goods for which supply chains are less flexible, may have lower elasticities to import price changes.

Elasticity rates for a given group of products between two given countries might not be constant either: the curve will likely have steeper sections. For example, once the tariff (or import price) hits a high enough rate, much of the trade in question might already stop, making further tariff increases relatively ineffective. Where that steep section lies may depend on economic factors (such as ease of moving production, etc.).

Strategic Fine-Tuning in Price Management

In the pricing world, we also overlay a strategic analytics layer on top of pure elasticity/math-based pricing approaches. For example, even if two product/customer markets have similar elasticities, we may price them differently depending on applicable business strategies. These strategies may include considerations such as the importance of the segment to the business overall: Is this a desirable, growing, profitable segment? If so, we may price to prioritize growth and volume, relative to a different, similarly-elastic segment that may be declining or may be less profitable to begin with (most optimization techniques will achieve some similar results, in some cases without the need for express strategic input).

Strategic Fine-Tuning of Tariffs

In the context of international trade and tariffs, governments typically favor industries that are more beneficial for their economies: These may be growing industries, or industries that provide higher-paying/better jobs. Governments across the globe have long been using tariffs to protect and nurture the domestic growth of such strategic industries.

In applying the across-the-board 4% assumption in the Trump tariffs, the initial calculations seemed to disregard variations in elasticity rates on what is being imported from each country, and what specific rate might be needed to drive changes in import quantities. Rather, as widely reported, trade imbalances represent the only mathematical factor to effectively drive tariff rate variations in the Trump administration’s formula to calculate tariff rates:

Because the administration made a singular 4% across-the-board elasticity assumption for the variable ε (price elasticity of import demand), and a 0.25 across-the-board assumption for variable φ (the passthrough from tariffs to import prices), these two variables cancel out when they are cross-multiplied in the denominator:

• A 4% tariff is assumed to cause only a 1% actual increase in import prices (0.25 pass-through assumption), because tariff costs are assumed to be largely absorbed before prices hit consumers.
• This resulting 1% actual retail price increase then reduces demand by 4% (4% elasticity assumption).
• The end result is a 1-to-1 relationship between the tariff rate change and demand quantity change, as far as the combined impact of passthrough and elasticity are concerned (4% tariff hike causing a 4% change in demand quantity).

Mathematically, this means that only x_i (exports to country x) and m_i (imports from country x) effectively impact the tariff rate τ_i. Besides exempting some “obvious” sectors from tariffs (such as energy or rare earth minerals), no factors beyond the export-import trade balance seemed to receive effective consideration in the mathematics involved. There is some controversy surrounding the Trump administration’s math (which values they used, and were they consistent in their formulaic approach) — but we will not delve into those details here.

Especially in light of the relatively low pre-tariff U.S. unemployment rate, a targeted approach focused on tariff-elastic, desirable industries could be favored. The initial tariff roll-out approach had an apparent disregard for these details — but this might not mean these details will be disregarded permanently. Perhaps the rollout was aimed to establish high starting points for country-by-country level negotiations (though imposing tariffs on uninhabited islands with no exports may still be hard to explain). Comments by Trump administration officials (they said “this is as high as tariffs will get,” and Trump is also on record of saying that the tariffs have put the U.S. in a strong negotiating position), as well as some aspects of the calculation logic, suggest this may be part of the overall picture everyone is dealing with currently.

The Initial Market Response – And What The Future Might Hold

If the point of the tariffs was to disrupt the status quo, the world is certainly responding. In the immediate hours and days following Trump’s “Liberation Day” tariffs unveiled on April 2, markets crashed hard and voters’ 401(k)s accounts lost significant value. Many executives were “not thrilled,” including at U.S.-based companies, and other countries retaliated with their own reciprocal tariffs. Experts had flashed warning signs of a recession in the U.S. and across the globe. These pressures impact everyone, including the Trump administration. This led to Trump announcing on April 9 a 90-day pause on all tariffs for nations except for China — which he raised import fees on to 125%. However, Trump maintained a blanket 10% import tariff on nearly all global imports.

All parties are motivated to review and refine their trade strategies. In the course of these developments, further changes in tariff rates are widely expected.

Tariffs may change differently from one situation to another. There are many reasons for trade imbalances. They include regulatory barriers (which are viewed as the main reasons limiting American agricultural product exports to the EU for example), and currency manipulation. Imposing high tariffs on “cheaters” like China (an alleged currency manipulator, IP stealer, etc.) might make sense in the long run, especially given their status as a global adversary. If we are truly just imposing reciprocal tariffs to counter real tariffs imposed by other countries, then doing so might also make long-term sense.

That said, the administration initially announced significant tariffs on imports from generally friendly nations as well, many of whom do not actually impose real, similar tariffs on U.S. exports to them. Tariff wars with friendly countries may cause more harm than good to anyone, especially if these tariff wars involve industries with less-desirable jobs, or if it appears unreasonable to expect that the root issue causing the trade imbalance can be resolved (whether that be supply chains that are hard-to-move, or regulations that are unlikely to change). In such cases, a more refined approach may be more effective.

As the administration holds discussions internally and with trading partners across the world, refinements are expected to be made to the tariff schemes (in many cases, this may result from “tailored deals”). Such refinements may reflect the kinds of considerations outlined above. If so, the Trump tariffs may end up resembling a well thought-out, more targeted pricing strategy, supported by detailed analyses, similar to the design of a pricing action formulated by pricing experts. The results of such actions are less disruptive and more effective relative to untargeted, across-the-board pricing actions that executives who “shoot from the hip” sometimes implement.

Because the outlined considerations are likely to play a role in the new tariffs’ future evolution, distributors may find it useful to reflect on them. Such analyses may help project how likely the high tariffs affecting distributors’ particular supply chain operations or their particular customers may end up lasting.

If the tariffs are effective and if there are good reasons to keep them, they may last a long time. Even the Biden administration kept the first Trump administration’s China tariffs in place, and the newly-started tariff/trade war with China seems to be escalating. In such cases, long-term strategies may be prioritized. These long-term strategies include looking for alternative suppliers to keep costs down. If switching suppliers or negotiating costs down with current suppliers prove not to be feasible, these strategies may also include straight-forward, permanent price increases to pass on tariff costs.

Having a diverse base of suppliers for key products, along with the ability to quickly negotiate new contracts with new suppliers, may provide an advantage in implementing relevant strategies. If pricing action is necessary, it may be beneficial to add a layer of analysis beyond simply passing on the tariff increase: With proper communications, customers should be relatively receptive to tariff-driven price hikes (they will largely perceive them as fair). This may open a window of opportunity for the distributor to correct past pricing errors (such as fixing unnecessarily underpriced product prices), which would be more difficult to do under normal circumstances.

On the other hand, the tariff may involve industries that are less tariff-elastic or less desirable, and it may impact suppliers from friendly nations. An example may be imports of certain goods from Canada, which were subject to the recent senate vote aiming to reverse Trump’s Canadian tariffs. Tariffs on EU goods may be another example:

• Even Trump allies like Elon Musk have publicly said they are hoping these tariffs will eventually go away
• As of the time of this writing, the U.S.-EU tariff/trade war has not escalated out of control (meaning, the EU’s initial reaction was to seek resolution through negotiation, and announced that they may impose only a measured/targeted tariff scheme in response, rather than harsher actions that would be more likely to substantially escalate the trade war)
• Trump has reportedly told his team to make “tailor-made” deals with countries that have reached out — and as noted before, the EU, and members of the EU, have so far been pursuing negotiations rather than escalation

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High tariff rates are less likely to last indefinitely in such situations: the administration is likely to eventually reduce or eliminate such ineffective tariff schemes, though they will likely seek to get some concessions in return (such as commitments to invest in the U.S., commitments to buy more U.S. goods, relax some regulatory barriers or actual tariffs). This means that temporary and easier-to-reverse approaches (such as surcharges for tariffs, for instance) may be preferred to deal with such tariff schemes’ short-term implications.

On a related note regarding the implementation of pricing actions — agile, well-informed, and well-managed execution can make a difference:

• Much like during the COVID disruption period, agile pricing systems can be useful to quickly analyze and manage changes in supply-, competitive- and demand-dynamics.
• And like during COVID, better information may be gained from proactively stepping up external communications with suppliers, and from more intense monitoring of competitors’ price moves and communications.
• Pricing actions can be better managed by:
  • Prioritizing internal communications with those involved in price setting, monitoring stick rates and price realization metrics, and using controls if necessary.
  • Ensuring that the rationale behind price moves is timely communicated to external market players (to the extent possible). These market players may include:
    • Customers: More detailed discussions with key customers may be considered to help ensure that specific tariff-related increases do not come as a surprise, and they can also be opportunities to assess possibly significant changes in future demand patterns.
    • Other industry players: The distributor may find it useful to communicate certain details about the pricing action to them (think industry leadership-followership dynamics), and may be able to do so using appropriate channels of communication.

Parting Thoughts

My sincere hope is that refinements to the current simplistic tariff scheme are made sooner rather than later. No one living or doing business the U.S. or in friendly nations should experience short-term pain for no good reason — as in situations where there is not a realistically achievable or particularly desirable payoff in sight. The sooner the refinements are made (hopefully, within the newly-announced 90-day period, or within an extension of the same), the sooner stability and relative certainty may return, thereby creating an environment that is more conducive to investment and growth. I believe I share this view with many others. This group includes economists who are not necessarily free trade supporters but are disappointed with the simplistic manner in which Trump’s “reciprocal” tariffs were initially introduced.