1. According to the briefing articles, what are the effects on the U.S. producers of metals, U.S. consumers
-Do not merely copy the words or directly quote the sentences in the articles or line up unrelated answers to the assigned questions. You may use as references the articles above, the textbook, and your lecture notes. No other print or online sources are allowed. Please include your citations and references using APA format if you cite the articles above and/or the textbook.
-The report should be 1.5 line-spaced, 11-point font.
The Effects of Import Tariffs
The U.S. tariffs on aluminum and steel imports would positively impact U.S. metal producers. The producers would experience a rise in well-being because the prices of their products in the domestic market would increase, causing producer surplus. Producer surplus occurs when the product's market price is higher than the minimum price a producer is willing to accept. The increase in prices would also stimulate the rise in the output of existing firms and probably the growth in new firms. For example, when Donald Trump imposed tariffs on steel and aluminum imports, steelmakers saw an increase in production capacity, with some idled capacity getting back online (The Economist, 2018). This change follows the principle that supply is directly proportional to the price. Thus, as prices of commodities increase, producers’ willingness and ability to supply the product increases proportionally.
The tariffs would have an unfavorable impact on U.S. consumers of metals. As imports drop in the domestic market, the quantity of demand relative to supply would increase, creating excess demand for metals. Consumers rely on price competition in a free market to make products affordable. If there are fewer products in the market, the producers are more likely to have greater market power hence the ability to increase prices. Thus, the metal producers would increase the prices to combat the rise in demand, implying that consumers would get the same product domestically at higher prices than before the tariffs.
The tariffs would benefit the economy with greater revenue, which can support many government spending programs to help its citizens. Additionally, the increase in demand for domestically produced metals would cause the opening of new firms that were initially inoperational. Consequently, it would increase the employment rate, increase revenue and spur economic growth. Overall, the domestic industry would become more competitive relative to international markets, promoting the country’s comparative advantage in metals. The effects can also be negative because of the potential decrease in consumption of domestic goods and retaliatory tariffs from trade partners. Overall, the effect depends on the balance between the gains and the losses. The government has to ensure the gains by producers and recipients of government revenue exceed the consumption loss.
Retaliatory tariffs by trading partners would affect U.S. producers by hindering their ability to compete in international markets. Producers benefit from free trade because their access to international markets enables them to sell their products where demand is high, hence more likely to bring more profits. However, if the trading partners impose retaliatory tariffs on U.S. producers, their ability to export would get impeded, giving the foreign firms an advantage. This decline in the international market for exports would force some producers to reduce their production capacity. While U.S. producers suffer from the decline in international demand for metals, the fixed costs for the firms would still be constant. In this case, the domestic steel and aluminum producers would see a decrease in profits which would cause some to downsize to keep operational costs down. Other producers would have to shut down to avoid excessive domestic competition.
Retaliatory tariffs disadvantage U.S. consumers differently in the short run and long run. In the short run, there would be more products in the domestic market because of the decline in exports. As a result, market prices are considerably low for domestically produced metals. In the long run, however, market prices for metals would increase because of the rise in the ratio of fixed costs to revenue. The domestic market would experience a shortage of metals as most imports are closed out and the domestic producers are unable to produce as much as they would with internal markets because of high fixed costs.
Retaliatory tariffs would negatively affect the U.S economy, because they would reduce revenue from domestically-produced metals. The domestic producers would have to reduce their output. It could be detrimental to the employment rate because steel and aluminum companies would have to reduce their workforce. The decline in output and rise in the unemployment rate would slow down the economic growth.
The national welfare effect of tariffs can be positive or negative depending on the size of the country. The welfare can be positive if a tariff is implemented by a large importing country. It matters that the U.S. is a large country because less demand for imports caused by the tariffs may reduce global demand for the metals to an extent that the price of importable metals drops. Hence, the decrease in import price relative to export prices cause an improvement in the terms of trade. Therefore, the U.S. would benefit from the policy of tariffs despite the potential decrease in the volume of international trade.
If the country imposing the tariff is small, the price of the metals would rise by the same amount as the tariff for the consumers and producers in that country. The international price would remain constant, indicating that there would be no improvement in the terms of trade for the country. In summary, for a small country imposing tariffs, the excess burden of the tariff falls wholly on the country because it cannot affect the terms of trade. On the other hand, a large country imposing a tariff can benefit from better terms of trade because it can shift the tariff burden to other countries.
The Economist. (2018). Metal clashing. https://www.economist.com/finance-and-economics/2018/08/09/tariffs-on-steel-and-aluminium-are-creating-some-winners