Question

The president is considering placing a tariff on the import of Japanese luxury cars. Discuss the economics and politics of such a policy. In particular, how would the policy affect the U.S. trade deficit? How would it affect the exchange rate? Who would be hurt by such a policy? Who would benefit?

Answer 1

Placing an import tariff on Japanese luxury cars would increase the price of luxury cars being imported, which would reduce the demand for these cars in the US. This would encourage the domestic producers of luxury cars to increase production and serve the market. The political lashbacks could be in the form of tariffs by Japan on US goods that Japan imports so as to cause loss to US producers like the US did to Japanese producers by taking their demand away by increasing prices of the imported good/s.

The US trade deficit would decrease since the net exports would increase (as imports fall). Thus, the demand for US dollar would increase relative to other currencies and the $ would appreciate (become more valuable).

The domestic consumers would be hurt by this policy since they have to pay a higher price than before, whether they consume from imports or their domestic producers. The domestic producers gain from this policy since there is now lesser international competition and lesser pressure to keep prices competitive (on the lower side). Thus, the domestic producers are protected by the US government and they can sell their output at a higher price than before the tariff was imposed.