John Puri notes the New York Fed study showing that tariffs have contributed to a rise in prices and says that is the point of tariffs.
It is true that the price mechanism is the tool of tariffs, but I’m not sure that higher prices are the point. In a free market (and our own market is the only one that we can, through our political efforts, make free), the price system should still work.
That is, if tariffs raise the price of an import (or goods made with imports) from $8 to $10, the American producer could set a price at $9.99 and win. But, the knowledge that a market clearing price exists below $9.99 is still a blaring incentive for other firms to enter the market at that price, usually by making some innovation or efficiency.
Hamilton argues as much in his “Report on Manufactures,” admitting that “it is not an unreasonable supposition, that measures, which serve to abridge the free competition of foreign Articles, have a tendency to occasion an enhancement of prices.” But that isn’t the end that is sought, and it shouldn’t be the one we expect:
The internal competition which takes place, soon does away every thing like Monopoly, and by degrees reduces the price of the Article to the minimum of a reasonable profit on the Capital employed. This accords with the reason of the thing, and with experience.
Whence it follows, that it is the interest of a community, with a view to eventual and permanent economy, to encourage the growth of manufactures. In a national view, a temporary enhancement of price must always be well compensated by a permanent reduction of it.
Tariffs of this sort aim not at raising prices for their own sake, but on establishing incentives for investment in American industry which, once productive, has its own reasons to reduce prices. The note that this accords with experience is an important one, because we’ve seen that as the world trading order changes, investors adjust, and their new patterns of investment actually tend to bring about a period of business and productive innovation. For that to happen though, the new order has to settle, not remain entirely uncertain.