I want to flag something before we start, because it's going to sound like I'm setting up a joke and I'm not.
That's how you know it's going to be good.
Hannah sent us this one.
Okay, now I'm interested, because Hannah doesn't usually send prompts. She buys the face cream that starts the arguments.
She does. And this is a follow-up to the face cream episode, which she has apparently been listening to. Daniel hasn't finished it yet, but Hannah got far enough to catch one line and it stuck with her.
Which line?
The one about how the government can lower costs for importers but can't necessarily force those savings to be passed on to consumers. So in practice, the importer's margin just gets bigger.
Right. That's the line I said, actually.
It is. And Hannah took it somewhere I did not expect. She said it reminded her of pinui binui.
Of course it did.
So here's her question, and I'll put it the way she put it. In pinui binui, developers get planning rights. Those rights let them make money by knocking down old buildings, giving the existing residents new apartments, and selling the extra units. But the authorities don't just let the developer earn whatever they want. The project gets examined economically. There are accepted profit ranges. Not too little, because then the project isn't viable and it never happens. Not too much, because they don't want an excessive return coming out of a public planning benefit.
That's the setup. What's the question?
The question is why the same logic doesn't apply to imports. If the government is changing regulation specifically to lower costs in the name of consumers, why not require some transparency about importer margins? Or limit how much of that benefit can just become additional profit? Why are developer margins exposed and scrutinized when someone asks for extra building rights, while importer margins can stay essentially invisible even when public policy is designed to make products cheaper?
That's a very good question and I'm annoyed I didn't ask it.
So we're going to spend the next twenty minutes on it. Two regulatory worlds. What they reveal about how governments capture, scrutinize, or completely ignore the gains that flow out of their own decisions.
And I should say up front, because it matters for how we handle this, that a lot of the specific numbers here I'm not going to assert with confidence. The shape of both systems I'm reasonably sure about. The precise figures, less so. I'd rather say that now than pretend otherwise for twenty minutes.
Good. Then let's start with the thing the government actually does, which is lower the cost of getting goods into the country. How does that work?
Four main levers, and they've all been used in Israel over the last decade or so. The first is customs and tariffs. You just cut the duty on a category of goods, and the cost of landing that good drops immediately. The second is standards reform. This is the big one, and it's usually described as the what's good for Europe is good for Israel model. The idea is that if a product is already approved for sale in the European Union, Israel should accept that approval rather than running it through its own separate conformity process.
Which sounds like a paperwork change.
It is a paperwork change, and that's exactly why it matters. The separate Israeli approval process was a real cost. Testing, retesting, labeling, the time it takes. If you're an importer bringing in a hundred thousand units of something, every shekel of that compliance cost is baked into what you paid to get the goods to the port. Remove it and your landed cost falls.
What's the third?
Parallel imports. The rules around who's allowed to import a branded product. Historically a lot of categories were effectively locked to the official importer for that brand. Loosen that and you can have a second or third importer bringing the same product in through a different channel, which should create price competition on that specific product.
And the fourth.
Ports. Ashdod and Haifa. The reform there was about introducing competition at the port level, so that the cost of moving a container off a ship and into the country isn't set by a single monopoly operator. Port handling fees are a real line item in an importer's cost sheet.
So four levers, all of them aimed at the same target, which is the cost base of the person bringing the goods in.
Correct. And here's where it gets interesting. Every one of those levers works on the importer's cost. None of them works on the importer's price.
Say that again, because I think that's the whole episode in one sentence.
The government can change what it costs you to bring a thing into the country. It cannot change what you decide to charge for it once it's here. Those are two different decisions made by two different actors, and the second one is not a government decision at all.
Once the goods clear customs, the importer sets the retail price.
The importer sets the price. Full stop. And in a competitive market, that's fine, because the next importer is standing there with the same product at a lower price and the first one has to respond. Competition does the work the regulation can't.
And in a market that isn't competitive?
Then the importer keeps the difference. The tariff goes from ten percent to zero, the importer's landed cost drops by that amount, and the shelf price stays exactly where it was. The importer's margin just got wider by the size of the reform.
So the reform succeeded. The cost of importing fell. It just didn't fall anywhere the consumer could reach.
There's a term for this and it's worth having, because it's the hinge of the whole comparison. Pass-through. The degree to which a cost reduction at one level of a supply chain shows up as a price reduction at the end of it.
And pass-through is not automatic.
Pass-through is a behavior, not a law of physics. It depends on how many competitors are in the market, how easily a new one can enter, how much pricing power the incumbent has, and how visible the whole thing is to the customer. In a market with five strong importers and no easy entry, pass-through can be close to zero. In a market with thirty importers fighting over shelf space, it can be most of the reduction within a year.
Which means the same reform can produce completely different outcomes in two different product categories.
Same law, same tariff cut, two different results, depending entirely on what the market underneath it looks like. And the government, when it announces the reform, is not announcing which of those two it's going to get.
Okay. Now take me to the other world. Pinui binui.
Pinui binui is urban renewal. You take an old building, usually from the fifties or sixties, often with structural problems and no safe room and no elevator. You demolish it. You build a new building in its place. The people who lived in the old building get new apartments in the new one, at no cost to them, sometimes with an addition, sometimes with a balcony, sometimes with a bigger floor plan.
And the developer pays for all of that.
The developer pays for the demolition, the construction, the temporary housing arrangements, the legal work, the whole thing. And the developer makes their money from the additional units.
The ones that weren't there before.
The old building had, say, twenty-four apartments. The new building has forty-eight. Twenty-four go back to the original residents. The other twenty-four go on the market, and the sale of those units is what funds the entire project.
So where does the government come in?
The government comes in because the developer cannot build forty-eight units on that plot under the existing zoning. The existing zoning says twenty-four. To build forty-eight, the developer needs additional building rights. Extra floors, extra density, sometimes a change in land use. And those rights are granted by a public planning process.
Which is the public benefit.
That's the public benefit. The value of the project is created by a planning decision. The land was always there. The demand was always there. What makes the project economically possible is that the state agreed to let the developer build more on that plot than the rules previously allowed.
And that's when the economic review kicks in.
That's when it kicks in. Because the state is now in the position of having handed a developer a very large amount of value, and it wants to know what the developer is going to do with it. So the project gets appraised. There's a whole professional practice around this, and the appraisal ties the developer's profit to a percentage of project costs or turnover.
What percentage?
This is where I have to be honest with you. The commonly discussed range is somewhere around fifteen to twenty-five percent, and I've seen that number cited in a lot of places, but I have not verified it against a primary source and I'm not going to present it as settled. Treat it as the shape of the thing rather than the number.
Fine. Fifteen to twenty-five percent, roughly, as the working assumption.
As the working assumption. And the logic of the range is what matters, not the endpoints. The floor exists because if the developer's expected return is too thin, nobody bids. The project dies in committee. The residents stay in the crumbling building. So the state has a real interest in the number being high enough to attract a developer.
And the ceiling?
The ceiling exists because the value being captured is coming from a public decision. The state granted the extra building rights. If the developer walks away with an enormous return, the public has effectively gifted a private party a windfall from a zoning change. So the appraisal caps it. Not at a punitive level. At a level that says the developer gets a fair return for the work and the risk, and the public gets the renewal.
So the developer's margin is exposed.
The developer's margin is exposed, examined, argued over by appraisers on both sides, and ultimately constrained by a process. The developer knows going in that their profit is going to be looked at.
Now put the two side by side, because I want to hear you say it.
In pinui binui, the profit comes from a public planning benefit, and the profit is reviewed and constrained. In imports, the profit comes from a public regulatory benefit, and the profit is not reviewed or constrained at all.
Same structure. Public decision creates private value. One gets audited, the other doesn't.
And I want to be precise about why the import side doesn't, because it's not laziness. It's a different legal theory of what's happening.
Go on.
When the state cuts a tariff, it is changing the rules of the market. It is not granting a specific benefit to a specific party. The tariff cut applies to everyone who imports that category. There's no application, no approval, no counterparty. The state isn't handing anything to anyone. It's just removing a cost that it had previously imposed.
So the state sees itself as having gotten out of the way, not as having given something.
And once you frame it that way, there's nothing to review. There's no grant, so there's no grantee, so there's no margin to examine. The importer's pricing decision is a private commercial decision made in a market the state has just made slightly cheaper to operate in.
Whereas in pinui binui the state is granting something specific to a specific developer, so there's a counterparty and a transaction to scrutinize.
There's a counterparty. There's an approval. There's a document with a name on it. And that's the difference between a benefit that has an address and a benefit that doesn't.
A benefit with an address.
The planning gain has an address. The tariff cut doesn't. And institutions audit things that have addresses.
Okay, so now the harder question. Could you give the tariff cut an address? Could you require the importer to show what happened to the savings?
You could try. There are three versions of this and they get progressively harder.
Start with the easiest.
Transparency. A disclosure requirement. If a product category had its tariff cut or its standards requirement removed, importers in that category would have to report their margin on those goods. Not capped. Just visible.
What's the problem with that?
Several. The first is that a margin on a single product line is almost meaningless in isolation. An importer brings in four hundred products. Some are loss leaders, some carry the whole business. If you force disclosure on the one category the state happened to reform, you're going to get a number that tells you very little about whether the consumer got a fair deal.
Because the importer can just allocate costs differently.
Cost allocation is the most elastic thing in accounting. You can move almost any cost onto or off a product line and the paperwork will still be true. So the disclosed number would be technically accurate and practically useless.
What's the second version?
A pass-through requirement. Not a cap on the margin, but an obligation to demonstrate that the cost reduction reached the shelf. You'd have to define a baseline price, measure the price after the reform, and show the difference.
And the problem there is the baseline.
The baseline is a nightmare. Prices move for a dozen reasons at once. Currency, shipping rates, fuel, seasonality, a competitor's promotion, a change in the packaging. If the tariff cut is ten percent and the shelf price falls four percent, did the importer pass through forty percent of the benefit, or did the importer pass through everything and then absorb a currency move that pushed the price back up?
You can't separate them.
You can't separate them without a level of cost data that no regulator has access to and no importer would volunteer.
And the third version, the one that actually matches pinui binui.
A profit cap. You set an accepted margin range for importers on goods affected by a specific reform, exactly the way the appraisal sets a range for a developer. And this is where the comparison breaks down in a way I find interesting.
Break it down for me.
Pinui binui is a discrete project. One plot, one developer, one application, one approval, one appraisal, one margin. The state reviews it because the state is a party to it. The developer cannot build without the state's permission, so the state has leverage at exactly the moment the developer needs something.
And imports?
Imports are diffuse. Thousands of products, hundreds of importers, supply chains that cross four countries, and no single approval moment where the state is holding the key. The tariff was already cut. The rules were already changed. The importer is now just running a business in a market that happens to be slightly cheaper than it was. There's no application pending. There's nothing to deny.
So the leverage is gone before the question even comes up.
The leverage exists at the moment of the grant. In planning, the grant is the permission to build, and the state holds it until the last minute. In trade, the grant is the rule change itself, and once it's published, it's done. You can't go back and attach conditions to a tariff cut three years later.
Unless you attached them at the time.
You could. In theory. A tariff cut could come with a condition. But now you're conditioning a rule that applies to every importer in a category, including ones who haven't started importing yet, including ones in other countries, and you're doing it in a legal environment where trade law has opinions about that kind of thing.
What kind of opinions?
The general direction of trade law is against conditions that single out importers for differential treatment. A cap on importer margin in a specific category is a fairly aggressive move, and it would be read by trading partners as a non-tariff barrier dressed up as consumer protection.
Which it might be.
Which it might be, and that's the honest problem with the whole idea. A margin cap on imports is a policy that sounds like it protects consumers and can very easily become a policy that protects domestic producers from foreign competition.
So walk me through the trade-offs properly, because I don't want to leave this as a nice idea that just needs the right regulator.
First trade-off. Competition. If you cap importer margins, you make the category less attractive to enter. Fewer importers means more concentration, which means less pass-through, which means the exact problem you were trying to solve gets worse. You'd be capping margins in a market that just became more oligopolistic.
Second.
Enforcement. In pinui binui, one appraiser can review one project in a few weeks. To do the equivalent for imports you'd need to monitor margins across thousands of product lines, in real time, with cost data you don't have. The regulatory apparatus would be larger than the market it's regulating.
Third.
Unintended consequences. Caps on margin create incentives to game the margin. You shift profit into a related company, you charge yourself a higher transfer price from your own supplier, you bundle the capped product with an uncapped one. Every margin cap in history has produced a cottage industry of people whose job is to make the margin look like something else.
Which is the same problem as the transparency version, just with higher stakes.
Same problem, higher stakes, and now with a legal penalty attached, which means the gaming gets more sophisticated rather than less.
So what's the honest answer to Hannah's question?
The honest answer is that the asymmetry is real and the comparison is sharp, but the reason the two systems differ isn't hypocrisy. It's that the state has leverage over a developer at the moment of the grant and has no equivalent leverage over an importer after the grant.
The benefit with an address gets audited. The benefit without one doesn't.
And the fix, if you want one, is probably not to audit the importer. It's to make the market competitive enough that pass-through happens on its own.
Which is the boring answer.
It's the boring answer and it's the one that actually works, which is usually how these things go.
There's a knock-on effect here I want to get to, because I think it's the part that actually matters politically.
Go on.
The government spends real political capital on these reforms. Tariff cuts, standards reform, port competition. These are announced as consumer victories. They're sold to the public as things that will lower prices. And if the savings don't reach the shelf, the public paid the cost of the reform and got nothing.
The public paid in lost tariff revenue.
The public paid in lost tariff revenue, in the disruption of the reform itself, in the political capital spent getting it through, and in the years of arguing about it. And the benefit landed in a margin that nobody can see.
And that's the erosion of trust you get. From a pattern of reforms that get announced as wins and then quietly don't show up at the till.
Which is how you end up with a public that doesn't believe any of it.
And a public that's right not to believe it, at least until someone shows them the price index.
So the asymmetry isn't just an academic curiosity. It's a mechanism that quietly converts public reform into private margin, over and over, and the political system has no way to notice.
It has no way to notice because there's nothing to notice. There's no document. There's no appraisal. There's no counterparty. There's just a price that stayed the same.
The planning gain has a file. The tariff cut has a press release.
That's the whole thing, honestly.
Okay. I think we've earned a break from our own analysis. Hilbert, you've been sitting there the whole time and I can see you've got something.
Hilbert: I used to clear shipments. Customs brokerage, small outfit, mostly food and household goods coming through Ashdod. And the thing nobody tells you is that the importer isn't the only one who keeps the savings. The retailer does too.
Say more.
Hilbert: The importer cuts his price to the retailer. The retailer doesn't cut the shelf price. He just widens his own margin and waits to see if anyone notices. Nobody notices. The customer sees the same number on the tag and assumes nothing happened.
So the savings get captured twice.
Hilbert: They get captured at every step where somebody has pricing power and no reason to give it up. Which is most steps.
Did you ever see a case where the price actually came down?
Hilbert: Once. A shipment of rice. The duty came off, the importer passed it through, and the retailer passed it through, because there was a competing chain two streets over selling the same rice and they'd have been embarrassed. Competition did it. Nothing else did.
That's the whole episode in one anecdote.
Hilbert: There was one form we had to file, and I remember it because of how stupid it was. Triplicate. Carbon paper. To certify that a consignment of instant coffee was being sold at a price consistent with the declared customs value. Three copies, one for us, one for the port, one for an office in Tel Aviv that I'm not convinced existed.
What happened if you got it wrong?
Hilbert: Nothing. That's the thing. Nobody ever checked. We filed it for eleven years and nobody ever asked a question about it. The form existed so that someone could say the oversight existed.
A form as a substitute for oversight.
Hilbert: That's most of what I did, honestly. Anyway. I've got a thing at four.
The rice is the part I keep coming back to. The rice. Because that's the answer to Hannah's question and it's not a regulatory answer at all.
It's a competition answer.
The state can't audit its way to pass-through. It can only make the market competitive enough that pass-through becomes the importer's own interest.
Which brings us to the thing I think most people get wrong about this whole topic.
The one where they assume the government can just make prices fall.
If the government lowers import costs, prices will fall. That's the belief. And it's wrong, because the cost reduction is upstream of the pricing decision and the pricing decision belongs to someone else.
The reform changes what the importer pays. It doesn't change what the importer charges. Those are two different decisions and only one of them is a government decision.
And the pinui binui comparison is real, but it's not a template. The developer gets audited because the state is holding the permission and the developer needs it. The importer doesn't need anything from the state once the rule is published.
The benefit with an address gets a file. The benefit without one gets a press release.
Which leaves the question open. If the state can scrutinize a developer's margin at the moment it grants planning rights, why can't it attach something at the moment it grants a regulatory benefit? Is the difference institutional, or legal, or just that nobody's tried?
I don't know. I think it's mostly legal, but I'd want to check before I said it with confidence.
And the pressure on this is only going one direction. Every government is using regulatory reform as its main tool for fighting the cost of living, because it's cheaper than spending money. And every time one of those reforms gets captured upstream, the case for doing something about the capture gets stronger.
Whether the pinui binui model can ever transfer to trade, I don't know. But the question isn't going away.
Thanks to Hilbert Flumingtop, our producer, who filed that form in triplicate and never got a question about it.
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