The Wall Street Journal claims that:

Some are concerned over the likelihood of the U.S. adopting trade tariffs on imports from China. This policy option would risk retaliatory measures and hurt U.S. exports, a blow to growth momentum, while making imports more expensive in the U.S., fueling inflation pressure. (emphasis added)

An academic article also says that the relationship is universally agreed upon by economists (gated link):

If there is one idea on which all orthodox economists concur, it is that tariffs raise prices, that protectionism, without exception, is inflationary. Professor Samuelson, for instance, argues that tariffs reduce labor productivity and enhance “the cost of living” (1976, p. 694). In the words of Coughlin et al., “protectionist policies increase prices” (1991, p. 25). According to the 1992 Economic Report of the President, “Trade barriers not only raise the prices of imported goods to consumers but also the prices of domestically produced goods” (p. 196).

I understand that tariffs reduce labor productivity by disallowing countries to produce in accordance with their comparative advantage. However, how does this lead to inflation? Is it because a decrease in goods produced plus the amount of money kept the same leads to inflation?

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    $\begingroup$ Most of your questions have multiple answers. Please consider accepting some of them. $\endgroup$ – denesp Jan 16 '17 at 7:02

Foreign produced goods will see price increases directly as a result of the tariff, which adds to the prices of these goods. The full tariff may not be passed through, as these higher prices will reduce demand, changing the supply/demand balance

Domestically produced goods will usually see price increases indirectly as a result of the tariff, as demand for these domestically produced goods will increase as a result of the weaker competition from foreign produced goods, assuming an upward sloping supply curve

Your quotes translate these likely price effects from tariffs into "inflation pressure"

  • $\begingroup$ In my understanding, inflation is fundamentally about money supply increasing more than the increase in real goods. Is that understanding correct? If yes, how is the money supply or the amount of real goods changed in this case? $\endgroup$ – Heisenberg Jan 16 '17 at 16:31
  • $\begingroup$ Saying prices changes are a purely monetary phenomenon is naive: it is true that excess money can lead to prices rising and insufficient to prices falling, so there might be an intermediate level at which prices do not change. But that is a macroeconomic tautology irrelevant to the point here, which is that a tariff will push up the relative prices of the goods affected and reduce effective productivity, either leading to price rises or to the necessity of wage cuts, either way leading to more hours needing to be worked to purchase the same amount of goods - a price rise in terms of labour $\endgroup$ – Henry Jan 16 '17 at 20:30

The price of the tariff will be passed along to the consumer. This is because of lack of domestic sources for the raw materials that comprise the constitution or fundamental of the good will need to remain from non domestic sources ie. steel, solar panels, aluminum, washing machines. This is because the natural resources on domestic side are tapped out/depleted/exhausted. However, the demand for said goods by the domestic consumer remains unchanged. US domestic is not a producer of raw iron for steel or aluminum. Ergo price increases.


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