Question

Problem set # 1. Trade Policy

This problem is about trade protection which certain developing countries use to protect their favorite industries, and also in the US, President Trump has advocated as a way of protecting American jobs.

Apply a diagrammatic approach you have learned from the lectures to show that a policy of for example protecting American steel industry by imposing tariffs on Chinese steel imports will (a) help the US steelworkers and (b) hurt the economy as a whole and show that the damage to the economy as a whole is greater than the benefit to the US steel industry. Identify the welfare (or efficiency) loss as a result.

Answer 1

1) While it will be extremely helpful to the domestic steel industries as they will be able to get hands on more and more of the domestic market. The clients will have no option but to buy from the American domestic steel manufacturing.

2) One has to understand that despite that, the domestic market is way more expensive and also the international demands is difficult without an import. After the tariffs, in long run the manufacturing units will face higher cost of production due to the higher domestic price of steel. Ultimately it will lead to higher prices in domestic market while the international market is cheaper. This will result in inflation affecting even the steel market. Also, the sanction would reduce the efficiency of American steel to compete in the international market.