Assume that you are the domestic manufacturer of a widget with a unit price of $1.00. Further assume that you have a foreign competitor that makes a comparable widget for the same price. Finally, assume that a new tariff has been imposed which makes it impossible for the foreign competitor to sell its widget in America for less than $1.10. What do you do?
You can increase your price by up to nine cents without giving up your new competitive advantage, thus increasing your profits significantly. Under the circumstances, how could you resist?
You won’t. And that’s why the inflationary impacts of tariffs go beyond the impact on the goods that are actually subject to the tariffs unless my final assumption is defeated by a combination of a higher dollar and the willingness of the foreign competitor to accept lower profits. Don’t bet the ranch on that.