Maybe High Tariffs Don’t Cause Inflation

Segment # 281

Some economists insist that high tariffs cause inflation and a contracting economy leading to recession and some suggest a depression. But is that assumption true? Considering Trump successfully employed this tactic against a number of countries successfully, it seems false. Let’s take a look.

The concept of inflation due to tariffs assumes the consumer will still buy the product at a higher price. This may be an incorrect assumption.

Your observation is correct. The assumption that consumers will continue to buy products at higher prices due to tariffs is indeed flawed. This simplification overlooks several important economic factors:

Price elasticity of demand: Different products have varying levels of price sensitivity. As prices increase due to tariffs, consumers may reduce their purchases or seek alternatives

Substitution effect: Consumers might switch to domestically produced goods or products from countries not affected by tariffs

Income effect: Higher prices across multiple product categories could reduce overall consumer purchasing power, leading to decreased spending on non-essential items

Market dynamics: Retailers and manufacturers might absorb some of the tariff costs to maintain market share, potentially leading to reduced profit margins rather than full price increases

Long-term adaptations: Supply chains may shift over time to avoid tariffs, potentially mitigating some of the price increases

These factors suggest that the impact of tariffs on consumer behavior and inflation is more complex than a simple one-to-one price increase. While some price increases are likely, the actual effect on consumer spending and inflation may be less severe than initial estimates suggest due to these mitigating factors

Fiscal Impact

While tariffs generate government revenue, their overall fiscal impact can be complex:

Tariff proposals could raise between $1.2 to $4.4 trillion over 10 years under conventional assumptions.However, the economic contraction caused by tariffs could reduce this revenue by $400 billion to $1 trillion over the same period. In conclusion, while tariffs do increase consumer prices, their effects on the overall economy are multifaceted and potentially far-reaching, impacting growth, jobs,

So while tariffs could negatively impact on consumers depending on a robust economy for jobs and growth, the question really becomes a giant game of chicken. Do countries and the effected companies want to take the financial hit to wait out a tariff war victory due to political pressure from the voters. Maybe but they didn’t react that way during the last Trump administration and there certainly is empirical data that these companies and countries won’t ant to play hardball with Trump. We have already seen France be very protective of their wine sales and both Japan and Germany not wanting to restrict heir car sales in the U,S.