Introduction
In an article “President Trump Signs Tariff Order on Metals With Wiggle Room for Allies’ give an account of a push by trump to have a 25% tariff on the importation of steel and 10% tariff on the importation of aluminum. The signing of tariffs was critical for national security. Trump thought it wise to have the tariffs as it will help save the jobs created as well as restoring the jobs lost in the aluminum and steel market. The tariff exempts the members of NAFTA who include Canada and Mexico. The move resulted in a lot of oppositions from countries like China and Europe who also think they should be exempted from the tariff. The Democrats agreed to the measure claiming that it was important for ascertaining the security of workers.
Discussion
Tariff effects usually discourage business and foreign countries to sell products. Tariffs make products less competitive as opposed to situations where tariffs did not exist. Therefore, it will reduce the number of goods available for consumption in the domestic country. As a result, domestic producers will be encouraged to increase their ultimate production as the home market will be more competitive. Even so, the lower supply in the domestic market will increase the prices of goods. In the case study, President Trump imposed a tariff on steel and aluminum which in turn discourage foreign countries, reduce supply in the US market, and increases the prices of steel and aluminum.
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Analysis
The market structure for steel and aluminum is pure oligopoly as it deals with homogenous products that lack competition. The market contains few producers producing the same type of good.
Usually, tariffs increase the prices of goods imported. Therefore, the policy helps in protecting domestic producers from the forceful reduction of prices due to high competition. Further, it leads to consumers spending more money to purchase the locally manufactured goods at higher prices.
Figure 1 illustrates the demand and supply of steel in a market that is not influenced by a tariff.
Figure 1 : Figure 1: market for Steel without the influence of a tarff
The vertical axis illustrates the prices of steel while the horizontal axis illustrates the quantity demand of steel. From Figure 1, the international trade forces, not influenced by tariffs. DD is the quantity of steel demanded in the country while DS is the quantity of steel supply by the country. The price of steel in the US is at P while the price in the global market is at P*. When prices are low, the consumers in the US will consume Q W amount of steel and aluminum. However, the United States can only produce a maximum of Q d steel and aluminum. Therefore, it has to import steel and aluminum that is worth Q w -Q d .
The measure by Trump to impose a 25% tariff on steel and a 10% tariff on aluminum reduce the amount of the imports by increases the cost of obtaining them. Figure 2 illustrates the impact that the tariffs have on the market for steel and aluminum.
Dead weight loss
The cost of domestic production is a and c and the cost of foreign production is c. thus there is the domestic producer surplus represented by a. b is the consumer change in consumer surplus. Both consumer surplus and demand surplus make up the economic surpluses. The totality of consumer surplus and domestic producer surplus plus the revenue received from the tariff makes up the deadweight loss that is represented by a and b. the deadweight loss is the consumer welfare lost due to the tariff.
Figure 2 : Effects of tariffs on Steel Market
Figure 2 illustrates the impacts of tariffs on steel and aluminum market. The vertical axis shows the prices of the two goods while the horizontal axis shows the quantity demanded the products. The imposition of the tariffs increases prices from p* to p’. The increase in prices has a direct impact on the production of aluminum and steel. Many companies in the United States will be willing to produce steel and aluminum because of the incentives. Therefore, the quantity produced will move rightwards while at the same time moving Q w leftwards. Therefore, new positions Q d and Q w will be attained as illustrated in Figure 1. Overall, the tariffs increase the prices of steel and aluminum, increase the quantity produced locally, and reduces the importation of the good.
Additionally, the effects of tariff can be analyzed and discussed as in figure 3. From figure 3, the vertical axis represents the prices of aluminum and steel while the horizontal axis represents the quantity of both goods as demanded. The curves S O and D O are the original supply and demand curves respectively. The two curves intersect at P O , Q O which is the equilibrium quantity and the equilibrium price. The imposition of tariff reduces the supply of steel and aluminum which consequently leads to a leftward shift from S o to S t and price moves from P O to P t . A new equilibrium is then established at P t , Q t where the supply is lower, and prices are high.
Figure 3 : Impacts of Tariff
Moreover, the higher prices that consumers pay for steel and aluminum that is produced both domestically and imported reduce the quantity that consumers can buy. Therefore, there will be a movement along the demand curve from Q o to Q t which leads to a loss in consumer surplus. In other terms, there will be a loss in economic value created by the difference between the world price of steel and aluminum and the quantity demanded.
Implications
With the rapid growth of globalization, trade relationships between countries are worth to consider. Usually, the imposition of the tariffs does not reduce the amount of steel and aluminum in other countries. Thus, countries that supply steel and aluminum to the US may not find market to replace their lost destinations; therefore, they may choose to retaliate by impossible tariff on US exports. Consequently, the measure by the US president may cause potential trade wars between the two countries. For this reason, there should be lower rates for the tariffs. Additionally, the high prices of domestic steel and aluminum can affect domestic consumption negatively. If the domestic prices will be higher than the prices of imported aluminum and steel, consumers will opt to acquire the commodities from outside market which in turn reduces sales in the country.
References
Bloomberge (2018). President Trump Signs Tariff Order on Metals With Wiggle Room for Allies. Fortune.
