by If Trump applies a 25% tariff on a .00 item the price will go to somewhere from .00 to .25. At .00 domestic producers have have been building all they can to sell at .00. In the short run they can not build more capacity so the domestic producer can raise their price to .25, or something under .25 if the foreign supplier can absorb part of the tariff. In the longer run domestic producers can produce more of the item but their costs will now be over .00. If they could have supplied it at under .00 they already would have been. Before they invest the capital to generate more capacity they will need some assurance that the tariff will not be removed and the import price will not go back to .00 making their new capacity unprofitable.
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If Trump applies a 25% tariff on a $1.00 item the price will go to somewhere from $1.00 to $1.25. At $1.00 domestic producers have have been building all they can to sell at $1.00. In the short run they can not build more capacity so the domestic producer can raise their price to $1.25, or something under $1.25 if the foreign supplier can absorb part of the tariff. In the longer run domestic producers can produce more of the item but their costs will now be over $1.00. If they could have supplied it at under $1.00 they already would have been. Before they invest the capital to generate more capacity they will need some assurance that the tariff will not be removed and the import price will not go back to $1.00 making their new capacity unprofitable. Does anyone, including Trump, have any idea how this end game will play out? Or, will we just see a 25% increase in the price and no change in the domestic and foreigner market share. In other words, why wouldn’t a new tariff just lead to higher prices and lower demand with no other changes?