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Why Do Domestic Prices Rise with Tarriffs?
- esafak 2y agoSince he jokingly hypes it up, is his Modern Principles of Economics good?
- v3lvet 2y ago[dead]
- bombela 2y agoIs it recursive? Presumably the same effect applies if it were tariff between towns, then counties, then states, and finally countries. Then what, we are missing interstellar trades to lower the prices on earth?
- marcosdumay 2y agoYes. Too bad interstellar trade will probably never be economically viable. But it would lower prices, yes.
- erehweb 2y agoSee also Krugman's paper on the theory of interstellar trade https://www.princeton.edu/~pkrugman/interstellar.pdf https://www.princeton.edu/~pkrugman/interstellar.pdf
- HideousKojima 2y agoAh yes, Paul "Inflation has slowed down (but not reversed) if you ignore all the things people actually need to live" Krugman. That man is a dishonest, partisan hack and if he said the sky was blue I'd go outside to make sure: https://x.com/paulkrugman/status/1712494317024026761 https://x.com/paulkrugman/status/1712494317024026761
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- thfuran 2y agoThe smaller the polity, the less practical it is to produce everything. Most towns aren't going to be growing wine grapes or olives at all, so tariffs would just raise local prices and lower imports rather than shifting local production. But they could also induce people to drive to the next town over for shopping.
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- JSR_FDED 2y agoTariffs only make sense to protect a fledgling domestic industry which is already receiving investment. Even then, does anyone think that for instance US car makers will suddenly be competitive globally?
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- ChocolateGod 2y agoEuropeans don't tend to buy American cars because they're too big for smaller older roads and are inefficient (Europe has no domestic petroleum source, so fuel prices are much higher and volatile). Tarrifs aren't going to change that.
- Gud 2y agoEurope has domestic petroleum production.
- n3storm 2y ago"Smaller older roads" XD We don't live every family in a house miles away from work, schools and friends. Many of us live in cities, within flats, with lines of metro or bus close by. Our children go walking to schools. Roads are fine and maintained so regular vehicles can be used instead of 4x4, bikes are respected. Roads have sidewalks to walk.
- poincaredisk 2y agoHave you ever been in the US? The roads there are huge. Road lanes are huge. Cars are huge. Crossroads are huge. Parking spots are extremely large. European roads are fine, but they are way more narrow and tuned for smaller vehicles. It's easier to drive with a smaller car (or "normal sized" for you). Also in Europe in the west we have narrow or paved historical roads, and in the east we have many poor quality roads. In both cases smaller (non-huge) car is beneficial.
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- browningstreet 2y agoI unfollowed Marginal Revolution when Tyler joined The Free Press this week. I’d already been pretty skeptical about the content on MR because there was very little rigor in the discourse and there are, apparently, no limits or constraints to what economists think they’re qualified to comment on, particularly when economics isn’t even invoked in the discussion. I don’t go to my doctor for a discussion on urban planning. And if I do.. not at their medical office. It’s a blog. Not a practice of economics, this one article notwithstanding. And it isn’t even by Cowen. EDIT: The comment section on MR is pretty awful too.
- simonsarris 2y agoAlex Tabarrok has co-authored Marginal Revolution with Tyler Cowen for a decade.
- davidw 2y agoAlex is a better straight up libertarian-ish guy. Tyler has been on this "but ... what if this CONTRARIAN thing....?" for a long time and I am done with it. I may not agree with Alex on this that or the other thing, but it doesn't feel like he's trying to show off how clever he is all the time.
- arthurofbabylon 2y agoI bet doctors have many compelling thoughts about urban planning. If they were enthusiastic, I'd curiously listen to what they have to say. (It is the intersection between domains where wisdom and innovation shine.)
- browningstreet 2y agoSure, but that wasn't the essence of my take. Everyone can have opinions on things, but if the doctor said, "As a doctor..." and then just talked about urban planning, I'd be suspect. "As a human..." would be different.
- throwoutway 2y ago
- mjevans 2y agoAny additional cost on top of the 'natural' costs involved with producing a result raises prices. Additional costs that direct resources to a government are a form of a tax, this includes direct taxes at the point of sale, and it should also include taxes incurred for traversing an arbitrary interface (tariff or toll). Any form of tax on goods / services proportionately effects those who spend more of their income on those goods / services more. Tariffs on not-luxury goods are regressive taxes on the poor and middle class.
- fire_lake 2y agoThis is too simple. Prices float somewhere between cost to produce and value to consumers. You can’t raise prices beyond value or no one will buy it. You can’t lower prices below costs (for too long) or you go out of business. Competition pushes prices down towards costs. Therefore businesses are always looking for markets with barriers so they can rise prices to value. Tariffs typically raise costs for all producers, but this only inevitably leads to price increases when competition has driven prices down to near costs. Unfortunately many staple grocery products fall into this category.
- Angostura 2y ago> You can’t raise prices beyond value or no one will buy it. Arguably, that's precisely the aim of some of these tariffs. Price the foreign imports out of the market
- Jtsummers 2y agoWhich could work if there were domestic alternatives or the capacity to produce domestic alternatives. The US lacks the apparel manufacturing capacity to takeover from the countries being hit with the current very high tariffs. We also lack the environmental factors to take over growing (ignoring the years needed to get started) coffee and vanilla and many other agricultural products.
- c22 2y agoBut isn't value subject to drift (inflation) and couldn't we inevitably expect such drift while raising costs across the board?
- neilwilson 2y agoAnd the exchange rate is mentioned precisely zero times in that article, as is the current unused and underused labour in the economy. Instead it drops straight onto land which we can’t make any more of. Do it again with a factory that puts on a double shift with the unemployed and see what happens. Do it again with the Chinese sovereign wealth funds, the likely source of mercantile intervention, offering 14 CNY per USD rather than the current 7. It’s unlikely that any production will move. What’s more likely to change is the quantity and location of financial savings. The distributional impact of that change is probably unknown.
- v3lvet 2y ago[dead]
- jillyboel 2y agolmao you think this is going to make the USD worth more? What are you smoking and can I have some?
- kgwgk 2y agohttps://www.reuters.com/markets/what-direction-will-trade-war-take-watch-yuan-mcgeever-2025-04-03/ https://www.reuters.com/markets/what-direction-will-trade-wa... > Beijing has previously said it won't go down the FX depreciation road, preferring to keep the yuan relatively "stable". But that was before Trump's self-styled "Liberation Day". Beijing's first response might be to try and negotiate with Washington to get the tariffs lowered. But if that fails, FX devaluation becomes a real option to offset the shock. They didn't take the negotiation route. We'll see what's next.
- leereeves 2y agoNations that sell products in the US have often sought to made their currency worth less vs the dollar, so their products are cheaper here. They might well do it again.
- kowabungalow 2y ago
- tlogan 2y agoIt is fascinating how the positions of the two major U.S. political parties have flipped on tariffs. Democrats, who historically supported protectionist trade measures, now oppose tariffs, while Republicans—once champions of free trade—have embraced them. Yes, party platforms evolve, but this kind of sudden reversal is still remarkable. What’s even more bizarre is the mental gymnastics on both sides. Some argue that tariffs somehow benefit CEOs and the wealthy, even though stock market reactions consistently show that tariffs hurt corporate profits. Others on the right now frame tariffs as a fundamentally “Republican” principle, despite decades of GOP support for free markets and globalization. Here’s my prediction: many CEOs and wealthy individuals will gravitate toward the Democratic Party. Why? Because tariffs reduce profits, and Trump’s policies seem designed to benefit a narrow segment of the rich rather than the broader business class. Over the next 8 to 16 years, we may see the GOP fully reposition as the party of the working class, while Democrats become the party of the affluent elite. Personally, I’ve always favored genuine free trade, which is why I’ve leaned Republican. But now, I’m not so sure. I used to argue with my liberal friends that tariffs are essentially a regressive tax—they raise prices for everyone, especially hurting lower-income consumers. The counterargument, of course, is that tariffs could incentivize companies to bring production back to the U.S. But let’s be honest: that’s not happening. Tariffs raise prices, but they don’t magically bring manufacturing back home. From my conservative perspective, companies should have the flexibility to offshore production—especially if they face pressure from unions or rising domestic costs.
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- jagger27 2y ago> From my conservative perspective, companies should have the flexibility to offshore production This is a very (neo)liberal viewpoint. It’s economic liberalism. There’s nothing “conservative” about it at all.
- chgs 2y agoThe corn laws were interesting. They were tarrifs on food imports, supported by the land owners. > the repeal of the Corn Laws benefitted the bottom 90% of income earners in the United Kingdom economically, while causing income losses for the top 10% of income earners. Obviously it’s not hard to see why the wealthiest like tarrifs.
- readthenotes1 2y ago[flagged]
- throw0101d 2y ago> If tariffs are so bad, why do most countries have them? The average global tariff rate is 2.6%: * https://en.wikipedia.org/wiki/List_of_countries_by_tariff_rate https://en.wikipedia.org/wiki/List_of_countries_by_tariff_ra... Most countries have an average / mean tariff rate of <10% per the World Bank and WTO. Further, most countries probably have zero tariffs on most products, with higher ones for specific reasons: * https://www.noahpinion.blog/p/when-are-tariffs-good https://www.noahpinion.blog/p/when-are-tariffs-good Tariffs have been falling for decades: * https://www.pewresearch.org/short-reads/2018/03/22/u-s-tariffs-are-among-the-lowest-in-the-world-and-in-the-nations-history/ https://www.pewresearch.org/short-reads/2018/03/22/u-s-tarif...
- readthenotes1 2y agoThe wiki link is kinda interesting. The first column is irrelevant, the last column exempts food and energy and still raises the question (based on the first column) of what the actual trade would be if there were no tariffs. Certainly for the first column it may be true that if the tariffs are so high on some products that there are going to be no imports and the "weighted actual" will be close to 0. I'm not going to the last column since it ignores two important categories.
- eximius 2y agoTariffs make things less globally economically efficient. Sometimes that is the goal for specific industries. Economic efficiency is not the ultimate goal. But no other country has blanket tariffs on so many other countries.
- davidw 2y agoMost countries have some small tariffs on this that or the other thing. Not massive tariffs on a huge range of goods. A bit of salt on your steak might be good, but if you emptied the entire salt shaker on it, it would be gross.
- oldpersonintx 2y ago[dead]
- munchler 2y ago> Expanding production without increasing costs is difficult What about economies of scale, though? If you can triple production while only doubling your cost, the unit price should drop.
- cbg0 2y agoOnly if there's competition.
- logankeenan 2y agoI believe they are referring to marginal costs. Yes, with economies of scale can become cheaper to produce, but they still require capital to reach that scale. https://en.m.wikipedia.org/wiki/Marginal_cost https://en.m.wikipedia.org/wiki/Marginal_cost
- jabl 2y agoIf anything, economies of scale are a powerful argument for free trade. Say, we can have a single company in Taiwan running insanely capital intensive chip factories making chips for the entire world. One downside of this being resiliency; what happens to the global electronics supply chain if China one day decides to invade Taiwan? Something not taken into account in typical economic models. For similar reasons developed countries still try to have things like domestic agriculture, despite that being a low value add industry where poorer countries might have a large comparative advantage in a hypothetical free trade scenario.
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- quantum_state 2y agoThe people who voted for Trump need to think again … they will end up being the suckers of all of the Trump policies…
- Herring 2y agoThe racism overrides everything with these people. The red states have had the worst outcomes for generations but they still vote Republican like lemmings solely because of it. Trump just has to mention "trans" and they switch off their brains.
- badc0ffee 2y agoThey switch off their brains?
- Herring 2y agoSee: How Tribalism Overrules Reason, and Makes Risky Times More Dangerous https://bigthink.com/articles/how-tribalism-overrules-reason-and-makes-risky-times-more-dangerous/ https://bigthink.com/articles/how-tribalism-overrules-reason...
- Cornbilly 2y agoIt’s just anti-intellectualism and fear across the board. And that’s been the GOP MO for a long time now. Convince people that the colleges are full of crazy liberals and you should go into the trades instead. Now that you’re in the trades, don’t join a union. Unions are bad (unless it’s the police union). Don’t look now but the Mexicans are coming for your job. The trans/gay people are coming for your children. Nevermind that the GOP is openly corrupt and has a pervert in the White House. Think back to the aftermath of 9/11 and the Bush Admin’s constant fear campaign that successfully pushed the US into two wars.
- Herring 2y agoIf you're not being targeted, like from a distance, it looks like "anti-intellectualism and fear". He's just running "distractions", or "scapegoating" Mexicans or something. It's easy to minimize it. Up close though, if you're the one actually being targeted, there's a bit more urgency. It's more like an abusive/controlling relationship. How many lives were destroyed or otherwise ruined by Bush's useless wars in the Middle East? Now imagine if Bush had instead built out a massive train network, like China did with close to the same amount of money.
- mindslight 2y ago"Why Do Prices Rise with a National Sales Tax?" This post is assuming that a sizeable domestic industry still exists, and also that demand is relatively elastic. This is sensible for wine and maybe sugar, but not for the myriad of equipment and supplies it would actually take to create new factories. If the goal is to paralyze and destroy the country, the high import taxes that Trump is pushing are a great way. That people continue to "4D chess" this buffoon "for the cause" continues to astound me.
- TaurenHunter 2y ago[flagged]
- JKCalhoun 2y agoI thought you were making a point but then your last sentence kind of shuttered everything that preceded.
- TaurenHunter 2y ago[flagged]
- SpicyLemonZest 2y agoIt ignores your points completely because they aren't true. The White House has explicitly, consistently, and in great detail said that the tariffs are not a negotiation tactic but a targeted measure aiming to reduce bilateral trade deficits. The idea that the tariffs are really about something else or might be removed in return for something else is, as far as I can tell, invented from whole cloth by cross-pressured Trump supporters who believe strongly in free trade but can't admit they don't support one of his policies.
- TaurenHunter 2y ago[flagged]
- SpicyLemonZest 2y ago[flagged]
- hiq 2y agoI'd accept the negotiation angle if the tariffs had been only threats with clear demands to avoid them. Trump could have demanded that your 3) be fulfilled by June, otherwise tariffs would apply. Instead we get tariffs with quick retaliation e.g. from China, and I still see no negotiation in place. The problem in general is that we are all, the US Congress included, guessing what the goal is.
- jmyeet 2y agoTariffs are an additional sales tax. That's it. That's all you need to do to explain this to people. It's amazing to me how many have fallen for this ridiculous lie that the other country somehow pays the tariff AND there will be no increase in cost to the consumer. I used to think these lies were cynical, like how Mexico was going to pay for the border wall. But I'm not convinced now. I think there's a not-insgificant chance the president doesn't know this is how tariffs work. And that's terrifying. I would respect a cycnical lie way more. You buy $1000 in t-shirts from China. The government places a 30% import duty on them. The importer pays $300 to the government. Those t-shirts now cost you $1300. Whoever sells them retail will be charging up to 30% extra to recoup that. It blows my mind that this even requires explanation.
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- relaxing 2y agoThe best explanation I’ve seen is that tariffs are a stick that can be used to enforce compliance with other policies, and selectively lifted when companies bend the knee.
- rsynnott 2y agoThat isn’t really how they’re supposed to work, and in a normally functioning country the state could expect to be sued by the injured parties (that is, the competitors of the specially favoured companies) if they tried it. Of course, in 2025 the US is hardly a normally functioning country, but it’s also not clear that its court system is _totally_ compromised, and any company who went along with this would certainly be taking a risk.
- relaxing 2y agoSue and risk further sanctions? We’re already seeing how little backbone there is for standing up to such actions.
- kbelder 2y ago
- throwaway657656 2y agoMy small business produces a niche consumer electronic device. Anyone watching us operate would say that our product is Made in the USA. But the components of our product are sourced and pre-processed all over the world and our COGS just increased significantly due to tariffs. We now have to raise our prices, but our Made in China competitors have to increase theirs even more. That isn't a net benefit for us, given the product is "nice to have" and does not have an inelastic price. If my sales drop by 50% and the Chinese competitors drop by 75%, is that winning ? I am still in shock and denial by all this. After 11 years in business, this manufactured/avoidable crisis can't be what ends us.
- Jtsummers 2y agoAnd it gets worse for you. That's primarily considering the US market. Your Chinese competitors aren't simultaneously being shut out of non-US markets (since this is a unilateral trade war, not the US + allies). Your US sales may drop 50% due to the change in price, and your Chinese competitor's US sales may drop by 75%, but their sales in other countries may not change at all. Meanwhile, your sales outside the US are going to drop because not only are your component costs going up driving your price up, you now face tariffs when selling in every other country in the world (if they choose to respond to the tariffs the US is levying on their goods).
- disgruntledphd2 2y agoBecause of how China desperately needs exports, they'll almost certainly end up being tariffed by the EU, so just because this started in the US doesn't mean it's gonna stay there.
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- SvenL 2y agoI don’t understand the argument why EU would tariff China just because they need export. Can you elaborate?
- yongjik 2y agoYou'd never guess from reading HN or Reddit, but I have to remind myself that not all who voted for Trump last year are MAGA. My understanding is that America has a lot of low-information voters. They don't watch debates. They share cat videos on Facebook. They certainly never comment on HN, they don't even know HN. On the election day, they think "The eggs are too damn expensive!" and vote accordingly. All the rhetorical offensives, counteroffensives, contortions, and motivated reasonings won't reach these people, when they go to the grocery and find everything getting more expensive. (Some of them might even have 401K and IRA. Yeah, I know, boomer stuff.) We'll see.
- rsynnott 2y agoThis is the most baffling thing about Trump’s strategy to me. Trump is essentially asking people to embrace pain now in exchange for jam tomorrow. But there’s no reason to think that the American public have any intention of embracing pain! Look how upset they got about eggs! This really all feels like it could very easily blow up in his face.
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- TaurenHunter 2y ago[flagged]
- cadamsdotcom 2y agoArticle assumes saturated resources and finite production capacity - neither of which are true when technology is added to the picture. What if, for example, tariffs incentivize technology development that allows hydroponic wine - making previously unviable land suddenly productive? Another counter-argument to the article: due to long-term reliance on trading partners for goods, production has likely been “turned down” for some goods/services to a point that there’s less opportunity cost than this article posits. For example the widely-quoted stat that almost one-quarter of Americans are functionally unemployed suggests trade has created new equilibria that leave capacity on the table. Especially when considering China’s well known policy of making the RMB cheaper against the USD than if it were allowed to float. If tariffs have the potential to drive employment up by bringing latent capacity online (through investment & after a lead-time), you can see how people are okay with experimenting.
- api_or_ipa 2y ago> What if, for example, tariffs incentivize technology development that allows hydroponic wine - making previously unviable land suddenly productive? This is a variant of the Import Substitution idea. Unfortunately, it doesn’t have a great track record. Instead of investment in innovation, sheltered industries tend to become less competitive and increasingly reliant on the shelter granted to them. Indeed, even if innovation occurs, it often becomes very hard to undo the sheltering once it’s no longer needed. Far better to allow countries with comparative advantage in growing grapes to use their land to make wine compared to investing in hydroponics. The irony of that very example is the vertical farming sector has recently learned this very lesson and is undergoing a market realignment after hopes of improved productivity have been found to be less than expected.
- sn9 2y agoWhat are the best introductory textbooks on economics for someone who knows multivariable calculus, linear algebra, and differential equations? Preferably with problem sets and solutions to test understanding. (In fact I'd argue books without those are almost useless outside of a university classroom.)
- csense 2y agoOne important cause of comparative advantage is cheap labor. Or perhaps I should say comparative "advantage" because cheap labor is actually bad from society's point of view! It used to be that a person in the US could graduate from high school and get a factory job that provided enough income to have a house with a yard, a non-working spouse, and children. Then the factories moved overseas to exploit the comparative advantage of cheap labor. If you have a tariff, it undoes the advantage that cheap labor used to provide. Operating in a society that pays its workers well is ultimately to business's advantage. Workers who have more money spend more money, they generally buy more products at higher prices and higher margins. Social and political stability happens when most people feel the system is working for them, they have a stake in the status quo, and they have something to lose. I don't dispute the OP article's thesis, that tariffs cause some loss of economic inefficiency. The question is whether the gain is worth the cost.
- acdha 2y ago> It used to be that a person in the US could graduate from high school and get a factory job that provided enough income to have a house with a yard, a non-working spouse, and children. This is more mythology than reality. The areas where it came the closest to being true excluded over half the population (women, non-white men) and were in industries and times where the U.S. had an enormous advantage over bombed out, financially precarious European competitors while our high upper-bracket tax rates and large numbers of government jobs provided strong support for the economy. Tariffs can’t get us back there, and alone they can’t even get close because what you really need are investments in a support web of infrastructure, education, and policy over time. That looks more like what Biden did with the CHIPS act where they invested in the factories, employees, committed to doing so long enough to make a multibillion dollar investment safe, and there was no talk of tariffs before alternatives existed. In the cases where tariffs make sense, they’re a limited part of a larger strategy.
- briHass 2y agoI'm a fan of CHIPS, but let's not pretend that doesn't have some geo-political externalities as well. We're going to be paying a steep price for trying to shove the (outsourcing real manufacturing) genie back in the bottle. Either we put it all on the National Debt IoU or we cold turkey our cheap good addiction.