The purpose of tariffs is to reduce supply, and allow local producers to increase costs without facing competition. So, supply will be affected, no matter what.
I think you’re mistaking change in price with its potential effect. And I think that hides some insight. Tariffs do nothing to supply. They increase the prices of the imported goods. As a result of the increased prices, you expect people to buy less. I think you call this effect reduced supply. That’s not a change in the supply though. It’s a change in the demand for the good. The supply is unchanged. The supply chain was able to produce and import 10 (or more) units prior to the tariffs, and the US consumer bought 10. Today the consumer can afford only 5, but the supply chain can still produce and import 10. Price rises decrease demand when the demand is elastic. Now you could just shortcut that and say tariffs decrease the availability of a good in the economy since less is purchased but that’s not the same as tariffs reducing supply. And that’s important for the following reason. If on one hand tariffs increase prices and on the other the government cuts taxes (increases the money supply) by an equivalent amount, people would be able to afford the new, higher price of the tariffed good and again buy the 10 units that can be supplied, effectively nullifying the tariff effect. In such a scenario, the amount of tariffed imported goods in the economy would remain unchanged compared to untariffed state.
The way we’d express this scenario in terms of inflation is that there would be short term inflation (increase in prices with the application of the tariffs) and then “wages would have caught up” (in my example by leaving higher disposable income after lower taxes). A process similar to the one economists are talking about post-COVID inflation. The inflation rate has decreased in most places but the price levels are higher and people are poorer. People began demanding higher wages to cover for the higher prices - which is the wages catching up part.
Now this kind of thing would be largely pointless for local manufacturers since the effective prices of the competing imports haven’t increased. It would achieve lowering the value of the dollar though, which would theoretically make American exports cheaper and therefore reduce trade balance. Again, I don’t think they’ll manage to do this, especially since they’re only talking about the tariff part of the scheme, and since there’s nothing currently preventing trade partners from moving away from the dollar… Also they could’ve just subsidized the industries they want to grow… And maybe tariff only their competitors once there’s enough production capacity in the US…
Sorry, I
Should have specified. These tariffs are designed to reduce supply. Tariffs of 125% are designed to get foreign sellers to abandon the market. That is what has happened reducing supply.
They are also triggering boycotts overseas, reducing demand.
You’re thinking it’s a zero sim game in terms of production and pricing, when elastic. When prices rise, outside of their control, producers seek other markets or produce different products.
Yeah over some period that could (likely would) occur and increasing the aggregate domestic demand wouldn’t necessarily restore the amount available imported goods in the economy, and it could indeed result in additional inflation. That makes sense but it’s gonna take a bit for supply chains to reshuffle. I think you’re right that it’s already beginning to happen.
I think you’re mistaking change in price with its potential effect. And I think that hides some insight. Tariffs do nothing to supply. They increase the prices of the imported goods. As a result of the increased prices, you expect people to buy less. I think you call this effect reduced supply. That’s not a change in the supply though. It’s a change in the demand for the good. The supply is unchanged. The supply chain was able to produce and import 10 (or more) units prior to the tariffs, and the US consumer bought 10. Today the consumer can afford only 5, but the supply chain can still produce and import 10. Price rises decrease demand when the demand is elastic. Now you could just shortcut that and say tariffs decrease the availability of a good in the economy since less is purchased but that’s not the same as tariffs reducing supply. And that’s important for the following reason. If on one hand tariffs increase prices and on the other the government cuts taxes (increases the money supply) by an equivalent amount, people would be able to afford the new, higher price of the tariffed good and again buy the 10 units that can be supplied, effectively nullifying the tariff effect. In such a scenario, the amount of tariffed imported goods in the economy would remain unchanged compared to untariffed state.
The way we’d express this scenario in terms of inflation is that there would be short term inflation (increase in prices with the application of the tariffs) and then “wages would have caught up” (in my example by leaving higher disposable income after lower taxes). A process similar to the one economists are talking about post-COVID inflation. The inflation rate has decreased in most places but the price levels are higher and people are poorer. People began demanding higher wages to cover for the higher prices - which is the wages catching up part.
Now this kind of thing would be largely pointless for local manufacturers since the effective prices of the competing imports haven’t increased. It would achieve lowering the value of the dollar though, which would theoretically make American exports cheaper and therefore reduce trade balance. Again, I don’t think they’ll manage to do this, especially since they’re only talking about the tariff part of the scheme, and since there’s nothing currently preventing trade partners from moving away from the dollar… Also they could’ve just subsidized the industries they want to grow… And maybe tariff only their competitors once there’s enough production capacity in the US…
Sorry, I
Should have specified. These tariffs are designed to reduce supply. Tariffs of 125% are designed to get foreign sellers to abandon the market. That is what has happened reducing supply.
They are also triggering boycotts overseas, reducing demand.
You’re thinking it’s a zero sim game in terms of production and pricing, when elastic. When prices rise, outside of their control, producers seek other markets or produce different products.
Yeah over some period that could (likely would) occur and increasing the aggregate domestic demand wouldn’t necessarily restore the amount available imported goods in the economy, and it could indeed result in additional inflation. That makes sense but it’s gonna take a bit for supply chains to reshuffle. I think you’re right that it’s already beginning to happen.