Question

Consider the Australian steel market. Australia is a small country and cannot influence the world price of steel which is $30 per ton. At this price, Australian demand for steel would be 120 tons. Nevertheless, Australia currently imposes a tariff of $10 per ton on steel imports. Demand for steel under this tariff is 100 tons.

Suppose now that Australia is considering entering a trade agreement with Korea that would reduce the tariff on Korean steel to zero while maintaining it on other steel producing countries. In particular, the tariff would remain on China, who is currently supplying all Australian imports of steel and the Chinese marginal cost is $30.

Assuming that there is no Australian production of steel, analyze the welfare implications of this tariff policy.

Answer 1

The import of Australia is totally dependent upon China that is the steel is imported from China only. Therefore due to the tariff the demand of Steel has declined by 20 tons. Due to the agreement with the Korea there will be no impact on the import by Australia since, all the Steel is imported from China.

The tariff will reduce the total welfare of Australia. After the agreement with Korea the tariff for Korean companies will be zero but all the steel is imported from China therefore there will be no change in total welfare. As china will be exporting steel with the tariff. Thus, no change in total welfare.