I want to take some time today to talk about everybody’s favorite subject matter, tariffs, not usually the hottest subject, but becoming a central focus in Donald Trump’s 2024 presidential campaign. There is almost no policy in Donald Trump’s 2024 presidential campaign. The two things where he does talk about policy regularly are all the tariffs he’s gonna slap on China and whoever else, and mass deportations in a militarized fashion of undocumented immigrants. Let’s not deal with the undocu undocumented immigrants here. Let’s deal with the tariffs. Donald Trump has said 10 to 20% tariff on China. He offhandedly recently threatened the company John Deere with 200%
tariffs if they go forward with moving some manufacturing to Mexico, as they are reportedly considering doing. And then Mitch McConnell was recently asked about this Republican senator, Mitch McConnell, what do you think? And Mitch McConnell said, I’m not a fan of tariffs. They raise prices for American consumers. One of the things that’s not disputed among economists and even among Republican and Democratic senators, is that as a general principle, the broad, sweeping tariffs that Donald Trump wants to do everything from China, for example,
will generate inflation and they will raise prices for American consumers. So what I want to talk about with you here today is, when do tariffs make sense? When do tariffs not cause inflation, versus when do they and I think this will make very clear why Donald Trump’s plan doesn’t make any sense. So whether tariffs raise domestic prices depends on how competitive is the industry where you are placing tariffs. How available are substitutes for whatever you are placing tariffs on? What are the broader market dynamics of the circumstances into which you are placing the tariff? So for example, if the country imposing the tariff doesn’t produce enough of that good domestically, or produces an inferior quality version of the product domestically, consumers will probably still opt for the foreign product. With the tariffs, the tariffs will make the product more expensive. Domestic prices will go up. So for example, if you have a country that imports a ton of electronics, they say, Hey, you know what? We’re gonna put a tariff on imported electronics, but there’s no equivalent quality domestic electronics. People keep buying the international electronics, paying the tariff, prices are going to go up. Another example, lack of substitutes. If there’s no good alternative sources for a particular product, either domestically or from another country, the price increase on the imports is going to drive up costs for consumer. So imagine you put a tariff on some unique foreign luxury product. Imagine a particular Swiss watch people say, Well, I can’t really get a good substitute in the United States. Or the substitute of is of lesser quality. I will pay the tariff and still pay what the Swiss watchmaker wants. Domestic prices go up. And then also, there’s the question of, like, if you have a strong market power for the importer, when foreign producers have major market power, or the domestic market really depends on that country, the tariff increases just going to be passed to consumer. So, for example, if you put a tariff on steel imports from a country in a country that heavily relies on imported steel, then you are going to put a lot of pressure to keep buying that foreign steel. And finally, sometimes a tariff can cause a supply chain distribution. And if that happens, like if you put a tariff on imported auto parts, that then causes a problem in the United States for getting the car to its final state that is going to lead to car prices going up. Now, there are times you can do tariffs without raising prices. If you have plenty of domestic supply of a particular product and you say, Well, if you get it from this other country, there will be a tariff. Plenty a good options domestically. You can use tariffs strategically. In that case, just a favor local purchasing that can work in specific situations. If there are substitutes available in the domestic, domestically produced substitutes available, you can put a tariff on the foreign good, and then people will move to the domestic substitute, and it’s not going to have an inflationary effect. If there is very elastic.
Demand and supply. You can do it. So, for example, there may be a tariff on a low cost textile from another country. That textile may have high elasticity of demand in that when the price goes up, manufacturers in the United States say, we have four other textiles we can use. It’s no big deal. We will just switch. That’s a way to use a tariff against a foreign country without causing inflation. But the point here is, these are very specific circumstances. Trump’s tariff on China will increase prices. Economists know it, Democratic and Republican senators know it, but Trump is insisting because he doesn’t know anything else about economics
