Suppose the United States imposes a 10% tariff on goods imported from foreign countries. Will import prices (including tariffs) go up by 10%? This depends on the supply elasticity of the aforementioned imports. If the elasticity of supply is not perfect, import prices will rise by less than 10%. To see this, consider the most basic tariff map in the known universe (from Feentra-Taylor) – if you can’t understand it, give up all hope of understanding tariff policy.
In the left panel we have the domestic market and on the right the international market. Import demand is derived from the gap between the domestic demand curve and the domestic supply curve. Import supply comes from foreign counterparts on the graph, where the X* curve is the gap between foreign domestic supply and foreign domestic demand. Under free trade, domestic and international market prices are the same, PW.
Now suppose the home government imposes a tariff, Ton. If the supply of foreign exports (imports in the domestic market) is not perfectly elastic supply, then the price of new imports in the domestic market rises to P*+t. Because there are now fewer imports, there will definitely be less supply from abroad, which will happen as prices fall phosphorus*. The price increase (including tariffs) is less than the tariff amount, Ton. Terms of trade effects from tariffs. Promoting foreign countries to sell to domestic at lower prices.In other words, whether tariffs are absorbed domestically or abroad is an empirical question (this responds to Mr. Bruce Hall’s view).
at this postal Looking at the impact of steel tariffs, I see a small gap between post-tariff import prices (excluding tariffs) and steel PPI, with a larger gap in early 2021 (figures reappear below in Figure 2).
figure 2: Steel PPI (blue) and steel import prices (brown), both logarithmic 2018M03=0. Recession dates as defined by NBER are shaded in gray. Orange indicates Section 232 tariffs are imposed. Source: BLS calculated by FRED, NBER and authors.
In principle, in the simplest elaboration (like the textbook chart in Figure 1 above), the gap should be relatively constant (the composition/weighting scheme of import prices and PPI is different and more complicated). However, if the slopes of the demand and supply curves change according to macroeconomic conditions (remember that in early 2021, the global economy is roaring from the Covid-19 slowdown), and one of them is on the curve, then the difference between the two measures The gap may widen.
I mentioned whether the U.S. or foreigners will bear the brunt of U.S. tariffs is a matter of experience.exist Amity et al. (2020)determined that U.S. consumers (including corporations in the broadest sense) bear almost all of the tariffs — except (interestingly) steel.
I’m sorry to assume people understand the basics of tariff analysis in my previous post. I hope people now understand that import prices (including tariffs) can change for reasons other than the level of tariffs.See my slides on tariffs/quotas for more textbook instructions under perfect competitionand under imperfect competition.
