Cooking the Books 1 – Who Benefits from Tariffs
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Please explain this passage:
‘Because [importers] will be making a smaller profit, they will import less and, in accordance with the law of supply and demand, the price of the good on which the tariff has been imposed will go up, whether imported or produced domestically.’
If the importers import less, then wouldn’t the domestic producers produce more to meet market demand (so the price of the good in question wouldn’t increase)?
Depends on what the good is, if domestic producers can produce it at all, and by how much and what speed production could be increased.
The situation before the tariff is imposed is that domestic producers cannot make a normal profit if their product has to sell at the same price as the imported product.
After the tariff has been imposed they no longer have to compete with cheaper imports but unless the price rises they will still not be able to make the normal profit.
The imposition of a tariff by reducing the profit of the importers will lead to them importing less and to total supply falling. In these circumstances prices will rise.
Once prices have risen then the domestic producers (old and maybe new entrants) will produce more as they can now make the normal profit, though not necessarily as much as the previous total as with a higher price market demand might not hold up. On the other hand, it might but in any event the price will have to have gone up.
– ALB
What do you mean by ‘normal profit’?
Let me get this straight, using a hypothetical situation:
Canada imports apples to the USA & they go on sale for 10 cents an apple. This is the same cost as American (i.e. domestically produced) apples. Canadian apple producers are making the ‘normal profit’ by selling at that price, whereas, American apple producers are not.
After the USA imposes tariffs on apples, the Canadian apple producers import less, therefore, reducing supply & increasing the cost of all apples to 20 cents each, which will enable the American apple producers to make a ‘normal profit’.
Did I get that right?
You’ve lost me in the final paragraph.
By “normal profits” I meant the profits that a capitalist would normally expect to make in whatever line of business they chose to invest.
The situation envisaged is that of a protective tariff, ie one imposed to protect domestic producers from cheaper imports. The assumption is that the call for this will have arisen because the domestic producers are being outcompeted by imports and so have been unable to make the profits they once made or would normally expect to make.
A tariff always makes imports more expensive. If the importers wanted to continue to sell the same amount they would have to reduce their price by the amount of the tariff; which would reduce their profits. They are more likely to reduce or even stop importing. This would reduce the supply and so lead, in the first instance, to an increase in the market price of the product in question.
An increase in its price would mean that domestic producers would be able to make the “normal” rate of profit again. Their profits would be protected.
That’s the theory and logic behind protective tariffs.
Tariffs can be imposed for other reasons. For instance, to raise revenue for the government. The aim then would not be to keep out imports as that would reduce the revenue. So, this type of tariff would be imposed on a product that can’t be produced locally or not in sufficient quantity.
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