Two kinds of supply shocks
Imagine a commodity that is a key input into much of our manufacturing industry, especially transportation sectors such as autos. Nearly half of our domestic consumption of this commodity is supplied by imports, although we maintain a large domestic production base, and even substantial exports.
Now imagine that there is a sudden spike in the price of that key input. (To avoid reasoning from a price change, let’s assume the price spike is not due to increased demand for the commodity). Does that hurt the US economy?
Does your answer depend on whether I’m talking about oil or steel?
PS. This interesting FT article explains how the new steel tariffs may force a number of US steel mills to shut down.
PPS. One difference between the two scenarios is tariff revenue to the US government. But this revenue will be trivial in a macro context, which is the focus of this post.