What will it take for Trump to remove a tariff ?
If Trump applies a 25% tariff on a $1.00 item the price will go to somewhere from $1.00 to $1.25. At $1.00 domestic producers have have been building all they can to sell at $1.00. In the short run they can not build more capacity so the domestic producer can raise their price to $1.25, or something under $1.25 if the foreign supplier can absorb part of the tariff. In the longer run domestic producers can produce more of the item but their costs will now be over $1.00. If they could have supplied it at under $1.00 they already would have been. Before they invest the capital to generate more capacity they will need some assurance that the tariff will not be removed and the import price will not go back to $1.00 making their new capacity unprofitable. Does anyone, including Trump, have any idea how this end game will play out? Or, will we just see a 25% increase in the price and no change in the domestic and foreigner market share. In other words, why wouldn’t a new tariff just lead to higher prices and lower demand with no other changes?
“…why wouldn’t a new tariff just lead to higher prices and lower demand with no other changes?”
You say it like this is a BAD thing. Mindless consumption of cheap crap imported from China is big part of what’s causing climate change. Anything that reduces such consumption is a positive, even if that is not Trump’s intent.
Thus says econ 101. As is usual, the reality is MUCH more complicated. Does the supply chain contain any inputs subject to a 25% tariff? Does the manufacturer have any excess capacity? Making more might be as simple as adding a shit/allowing overetime or as complicated as building a new plant. Will retaliatory tarriffs decrease the demand for the company’s exports? They can simply sell more domestically at a higher price. How elastic is demand? If there is an easy substitute for the product domestically available at $1.10, there may be very little demand at $1.25. The specifics pretty much drown out the general supply demand curve.
“Does anyone, including Trump, have any idea how this end game will play out? “
If President Trump is allowed to play out the game, then China will be forced to import more from the United States and export less to the United States.
Some degree of equilibrium will be reached. The US will still import more from China than it exports to China. And the same thing will play out with other US trade partners.
The only significant question is will the United States’ economy suffer more from China’s tariffs on $60Billion of US goods? Or will China’s economy suffer more from the US’s tariffs on $250Billion worth of China’s goods? Or perhaps the tariffs will be on $130Billion versus $500Billion…
China is buying food, we are buying television sets.
China has a losing hand. China only got away with this because US politicians were gullible or co-conspirators.
Along the way some US producers may be able to raise prices a little. So what? If you want omelets you have to break a few eggs.
Consumption of cheap trade goods has not made most Americans either happy or hopeful.
The increasing number of food banks, homelessness, and drug overdose deaths are NOT positive indicators.
Even if the bilateral US – China trade deficit is reduced it does not mean that the total US trade deficit will also be cut. The current account ( trade) deficit is driven by the domestic savings-investment gap and the Republican tax policy implies that the saving- investment gap will continue t o grow. Trump has massively misdiagnosed the cause of the deficit and his medicine will not work. So what will he do when he finds out that he is not reducing the trade deficit?
Remember, in the 1980s it was the deficit with Japan that was destroying the US.