Siddhant_1212210068

International trade case 2: Tariffs

Q1. What effects do you expect the tariffs will have on tire imports, prices, and production of
US tires?

(Hint: use traditional tool of welfare analysis, which include consumer and producer surplus.)

Ans: Tariff is basically a tax paid on imports and exports of a country in order to control as
well as have a balance between export and imports. Countries exporting goods, aim to export
goods at lower prices than the domestic prices of a country. Thus the domestic country
demands more of imports as the prices are less compared to their domestic prices. Similar, is
the case with US and China, where China is exporting truck tires to US which are light-
weight and at low cost than the domestic price of tires in US. US automobile industry
demands more tires from China which increases US tires imports. There is consumer surplus
as the consumers are willing to pay domestic price of tires but instead are buying China tires
which are cheaper. Excess imports will lead to disruption of domestic US tires market
equilibrium as the demand for US produced tires has decreased. Thus, the production of tires
will also become less. There will be no benefit of producer surplus achieved to the domestic
producers as they will have lower their selling price to sell tires in the market. This will affect
the US economy and to prevent this from happening, the US government imposed hefty tariff
on tires imported from China. Tariff will control the excess imports from China as the prices
of tires imported from China will increase. Hence, the demand for China tires will decline. As
a result, the demand and supply for US tires will incline not to the original equilibrium level
however. There will be benefit of producer surplus to domestic producers after the imposition
of tariff as the market price of tires will increase from initial world supply price.
 Market for US tires.

D S

Q2. What
e
effects from
P World Supply China
+ tariff tariffs do you
expect in
World Supply China
terms of
employment
Q in the tire
industry and beyond?

Tariffs will increase employment if there is unemployment in the economy. Assuming the
case of US importing tires from China, there will be unemployment in the US tires market as
the production of US tires have decreased and firms will sack workers in order cut down
costs. That’s why the United Steelworkers of America, which represented workers in many
US tire production.

Tariffs will control the excess imports, which will allow domestic producers to increase
supply and thus, employment will increase as in order to increase production, more workers
are required so the firms will again hire more workers.

Q3. Discuss the various positions of the stakeholders and rationalize them. What is the
political economy of providing protection to certain industries?

Many stakeholders like Leo Gerard who is the president of united steelworkers international,
were in favour with the president Obama’s decision. Democrat Ohio Senator Sherrod Brown
supported tariffs.

Since US is open to world trade, it wants to increase it exports and control excess imports.
The current scenario where China disrupts their tires market, similarly there will many
countries who will enter US to sell their goods if they see the opportunity to capture US
market. This will have a negative impact on US economy in terms of growth, employment,
and more will decline. In order to prevent, role of government and political economy is
necessary to provide protection to such industries. Every country desires to have balance of
payments and for that government is required to maintain regulation of the economy. Same is
the case with US, US government will take appropriate measures to control imports but not
ban them and at the same time, it will strengthen its production so that it can enter world rade
and export their goods to various countires.

Q4. Trade specialists such as Doug Irwin from Dartmouth have argued that the types of
actions that we saw with regard to tires were, indirectly, a result of the political necessity to
maintain public support for an open world-trading system. What is meant here? Do you
agree?

As mentioned before, there should be balance of payments in a country. If there are excess
imports, it might be beneficial to consumers and disadvantage for the domestic producers.
This will have low confidence in producers along with unemployment. Excess exports on the
hand will be beneficial to producers and might be disadvantage to consumers if there is cause
of shortage in market. In both cases, the public with disadvantage would want some sort of
support by the government to boost up the economy. Thus, the statement mentioned in the
question above is quite justified to some extent