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ELI5 How does a tariff against a major trading partner effect the common pleebs?
(self.explainlikeimfive)
So there's the way a tariff is meant to work in theory, and then there's the way they actually work in practice.
In theory:
The whole supposed purpose of a tariff is to make foreign manufactured goods more expensive than domestic competition so that domestic consumers have a price incentive to buy from domestic manufacturers. To that end, the point of a tariff is to raise prices on foreign goods. The government imposes a tax on the company which imports the foreign product, making the importer's costs go up. That importer passes on the cost of the tariff to the wholesaler/retailer by increasing their sale price of the imported product. The retailer then passes that higher cost on to the consumer in the form of a higher retail price. The consumer then has to pay more for the foreign product.
The goal here is to raise the price of the foreign product above that of the domestic competition so that people buy domestic. Overtime, the increased sales for the domestic product is supposed to increase revenue enough that the company expands operations, hires more workers, builds more factories, etc.
Following the theory, in the short-term the effect on common people is to raise prices of foreign goods. Since most people aren't looking at where their products are made, they just buy whatever is cheap, the effect is to raise prices on the cheapest goods. The lowest priced option in that product category gets more expensive. Over the medium-to-long term, the domestic manufacturers expanding operations is supposed to create more jobs and increase revenue for government. More jobs is supposed to create a more competitive labor market, which is supposed to raise wages. This is also supposed to increase government revenue. With more revenue, the government should be able to provide more/better services..
HOWEVER, Tariffs almost never work out in practice how the theory suggest they should.
In practice:
There's one giant flaw to the whole theory behind tariffs. It presupposes that domestic manufacturers will keep their prices unchanged from before the tariffs are introduced AND make large capital investments to expand operations. But this almost never happens. Before the tariff is introduced, there's a (relatively) stable economic equilibrium. All manufacturers have set up their operations for their share of the market. If they are currently selling 10,000 widgets per day, their operations are set up to produce roughly that amount. If their competition's prices jump because a tariff has been imposed, they don't have the capacity to rapidly increase production. If orders jump from 10,000 per day to 100,000 per day, they can't easily fill them all. And expanding operations is an expensive prospect without guaranteed payoff. What if the tariff is dropped in 6 months and the competition's price drops back down. Now you're set up to produce 100,000 widgets per day, but sales have dropped back down to 10,000. Now they're stuck with new factories, more employees, etc geared towards producing a quantity of product they can't sell.
It's safer and easier to NOT expand operations. So what happens almost every single time is that the domestic manufacturers increase prices a similar amount as the foreign competition. They don't have to pay a tariff tax, though, so the domestic companies just pocket the increased revenue resulting from charging higher prices. Everyone's market share stays the same, but consumers end up paying more and the rich get richer.