This article, published by BBC, is
about the US imposing tariffs on imported washing machines and solar panels.
This was a step towards the president’s trade policy, “America first” is to
protect local jobs from foreign competition. The first 1.2 million imported
washing machines will have 20% tariff, and any quantity beyond that will be
subject to a 50% tariff. For solar panels, the tariffs in the first year will
be 30% although the first 2.5 GW of the panels will pass tariff-free.
The trade deficit is an measure of
international trade and it occurs when a country’s imports exceed its exports:
Trade Deficit = Total Value of Imports – Total Value of Exports. The US’s goal
is to reduce the trade deficit problem. Protectionism is defined as the
governmental restriction on international trade. Tariff is a type of
protectionism which is a tax imposed on imported goods and services. By
imposing tariffs, America is hoping to bring jobs back and reduce imports.
The graph above shows a shift of the
world supply upwards with the addition of tariffs. This reflects higher costs.
The new tariff price will allow domestic producers to produce more so they earn
greater revenue because of the shift of Q1 to Q4. The government collects the
import tax: tariff revenue. Consumers pay higher prices and also buy less of
the product from 0-Q2 to 0-Q3. The X and Y are the welfare loss because there
is production of that amount already at the P1 but now consumers have to pay
more for domestic firms to produce it. The consumer’s demand decreases from Q2
to Q3. The Y is the loss of consumer surplus. Overall there is a decrease in
imports, increased domestic production and higher prices.
The main advantage of imposing a
tariff is increasing domestic employment. The tariff is set on imports so this
decreases the flow of imports as they become more expensive. The domestic
products are then more in favor and likely to be either the same price or lower
than imports. The jobs will be safe from foreign competition. According to the
article, “Shares in Whirlpool rose 2.5% … employ 200 more people.”. The second
advantage is to overcome or decrease the trade deficit. The protectionism policy was set in order to
break the imbalance of balance of payments. When the trade deficit is reduced
it will promote local employment, increase in net exports and more demand for
domestic products. This is a step forward for trump’s criticism, “making our
products, stealing our companies and destroying our jobs”. The last advantage
is that it might prevent from the dumping of the foreign goods into the
domestic market because of the “artificially low-priced” which are below
their average costs.
The main disadvantage is a
misallocation of income. Domestic producer dislocates their capital and workers
to be able to compete but realized that they don’t have the same comparative
advantage so it inefficient. The second disadvantage is that China, as
mentioned in the article, may open a production facility in the U.S to avoid
tariffs. This would increase competition. So more firms will start production
elsewhere than China. This leads to the third disadvantage, the trade war, this
is when two countries try to slow down each others’ trade. As China states,
“not only aroused the concern of many trading partners but was also
strongly opposed by many local governments and downstream enterprises in the
China has a comparative advantage
over the US in producing solar panels and washing machines, therefore, it would
be a more rational decision to trade than to impose a tariff. Another solution
should be introduced in order to increase jobs and decrease trade deficit. This
could be giving subsidies per unit. Like shown in the diagram, supply shifts to
the right. This is because subsidies are benefits usually money given to firms
to produce a good inorder to lower the cost and to decrease the imports.
subsidies help the domestic firms by giving them benefits while tariffs create
disagreements, adds on to the cost of production and prices to increase. A long term solutions
can also be to introduce a supply side policy, this would increase efficiency,
welfare, create a balance global trade and higher competitiveness of domestic
producers. In my opinion, Supply side policy would be more beneficial. Supply
side policy does take a long period but the impacts are outweighing the time.