Why companies can’t just absorb costs.
Recently, a post from President Trump on Truth Social went viral. An attempt to convince retail giant Walmart to keep prices down despite the tariffs, it read:
Walmart should STOP trying to blame Tariffs as the reason for raising prices throughout the chain. Walmart made BILLIONS OF DOLLARS last year, far more than expected. Between Walmart and China they should, as is said, “EAT THE TARIFFS,” and not charge valued customers ANYTHING. I’ll be watching, and so will your customers!!!
Trump’s demand here is, simply put, unreasonable, and it reflects a basic misunderstanding of how pricing decisions are made in a market economy. Let’s unpack why.
Walmart’s Thin Margins
The biggest problem with the President’s view is that it doesn’t pass a basic numbers test. To break it down, let’s look at Walmart’s financials.
It’s true that Walmart generates billions of dollars in revenue each year, but revenue alone doesn’t tell us how much Walmart makes.
To understand that, we need to consider profit, which accounts for the company’s costs. More specifically, we want to look at Walmart’s net profit margin, because that’s an extremely important indicator of whether Walmart could realistically “eat the tariffs.”
Depending on the source, Walmart’s net profit margin is somewhere between 2% and 3%. Let’s split the difference and say it’s 2.5%. What does that mean?
That means, if Walmart sells you $1 of goods, it only keeps 2.5 cents in profit. That’s right, 97.5 cents goes toward inventory, employee wages, store maintenance, and a variety of other operating costs.
Put another way, if you spend $100 at Walmart, they make $2.50 in profit.
Now let’s say you buy a $100 television that Walmart imports. A $20 tariff is imposed—an added cost Walmart has to pay to import the TV. Before the tariff, Walmart was making $2.50 in profits. After the tariff, it’s now taking a $17.50 loss.
The only way Walmart can still sell this TV is by raising the price.
At this point, a tariff supporter might respond: “The easy way to fix this is to buy US-made TVs instead!”
Sure—you can avoid tariffs by only buying domestic, but the problem is that domestic TVs tend to be more expensive. If they weren’t, Walmart wouldn’t be importing them in the first place. So even if Walmart pulls international TVs off the shelves and replaces them with US-made ones, the prices still increase.
Here’s the key point: “eating” the tariffs is not an option. Walmart operates on slim margins, barely making pennies on the dollar—there isn’t room to eat 20% cost increases!
The Fallacy of Seller Price Determination
Trump here echoes a fallacy often heard from the Bernie Sanders left—the idea that companies can just choose their prices!
While it’s true that companies can put any number they want on a price tag, it’s fallacious to assume that they control prices. To see why, let’s consider a simplified example.
Suppose Walmart wanted to set the price of a TV at $10,000. Could they do it? Technically, yes: the store could change the price tag for a TV. But the product wouldn’t sell. Competitive pressure from other retailers would drive customers to alternatives.
Now suppose Walmart priced the TV at $1. This might seem more feasible—people would jump at the opportunity to buy a $1 TV. But in the long term, that price point is just as unsustainable. Walmart can’t make a profit on $1 TVs, and savvy customers would resell them at a markup. Eventually, the losses generated by the $1 would be too great to bear, and Walmart would either need to raise prices or go out of business.
Businesses print the price tag, but they do not determine prices. In a market economy, prices are set according to the subjective valuations of consumers and the relationship between supply and demand. If people don’t value a TV at $10,000, the price will not go that high. If people value TVs at significantly higher than $1, the price will not stay that low.
This is the fundamental flaw in Trump’s demand that Walmart “eat the tariffs.” Walmart cannot simply freeze prices, because Walmart does not control prices. When tariffs are implemented, fewer TVs flow into the country, consumers compete for scarce goods, and prices go up.
Telling Walmart to “eat the tariffs” reflects a fallacious way of thinking. Walmart has razor-thin margins, and telling them to keep prices low is essentially telling them to operate at a loss. In the competitive world, businesses that make losses don’t survive. As Margaret Thatcher might say, the problem with telling businesses to keep prices low is that eventually, you run out of other people’s money.
