Reviewing one of the key factors that are causing the impact of tariffs to not be what many were expecting.
All things being equal, given company A in country A, and company B in country B, each producing a product that are substitutes of each other being sold in market A:
1. When the primary difference is price, customers in Market A will go for the cheaper product when all other factors about the product are the same. (I.e. quality, craftsmanship, etc).
2. If company A pays taxes and other cost of existence factors for a business in country A that are greater than what company B pays, Company B is at a competitive advantage. Company B can make the product cheaper.
3. A tariff increases the cost to bring to market the product of company B.
4. When the tariff increases costs for Company B such that they must sell at a high price, and the tariff causes the cost to equal that of company A’s costs, then the market for the product is equalized.
5. Therefore, the price for the product from company B is now equal to that of Company A. So other competitive factors come into play for the customer in market A than price (i.e. quality, brand loyalty, etc)
6. Inflation, being the increase in price for goods based on change in the value of currency, being expanded to include increases in price due to cost increases: inflation will be affected by tariffs when they increase the cost to bring to market such that it is greater than the cost of existence of company A, allowing company A to increase prices for larger profitability while remaining competitive.
