I never took any economics courses, so I don’t know if this question sounds rudimentary or not.
Lets say Trump puts a 25% tariff on steel. I don’t know what a ton of steel costs from overseas, say $1000. With the tariff, international steel now becomes $1250 a ton.
Isn’t there a risk that domestic suppliers will just raise their prices high enough to still be cheaper than overseas, but more than before?
Like if domestic suppliers were charging $1100 a ton, now with the tariffs the raise their prices to $1200 a ton? Still cheaper than steel from overseas, but more expensive than it was before?
Or does competition and market forces force the domestic steel suppliers to offer the lowest price possible, so that if one supplier tries to do this they will be undercut by other suppliers?
Yes–in principle, domestic competition means the price will be the supplier’s cost, not the tariff price. Actually, it will be the price of the second-most-efficient supplier: if one can do it for $1100 and the other $1200, then the price will be $1199 or some such.
Of course this assumes that domestic competition exists, which is somewhat questionable for any tariffed commodity, since the whole point is to protect a dying industry that may have lost several companies already. And there are various added complexities, such as that the price may not drop quite to the cost, but leave some profit margin to invest in expansion. This depends on if the tariffs look to be long-term or not.
All in all, it’s a complex problem, but regardless, there’s no reason to believe that the tariff price is special here–the tariff just takes some suppliers out of the picture. Competition among the remainder works as it did before. The tariff could be 1000% and it would work the same way, unless domestic suppliers are so inefficient that they can’t even match that price.
Its not a risk, it’s a basic assumption.
Yes, but keep in mind that it’s possible for the “foreign goods price + tariff” to still be cheaper than the going rate for domestic product. Especially since you can’t assume the “foreign goods price” will not be lowered to partially or fully offset the tariff.
It’s generally bad business to slap on tariffs like this, but it’s always important to do a dynamic analysis in economics, not a static one.