Question

Question 2

(a) Analyse what triggered President Trump in the U.S. in 2018 to impose protectionisitic tariffs on China, Mexico, Canada and the European Union.

(b) Discuss, with an appropriate diagram, how the U.S.-China trade war led to economic inefficiencies.

(c) Discuss how China as the Factory of the World is based on its comparative advantage while the U.S. loses its competitiveness.

Answer 1

Answer to Option A)

The trump administration decided in around May 2018 to impose heavy tariffs on China, Mexico, Canada and the European Union as it began realizing that it was over dependent on these countries for raw materials which were critical to the country.

And while it was still procuring these raw materials at an increased overall price, the other countries in question would often charge America with high tariffs on imports. This led to fiscal imbalance in the country.

Industries such as weapons heavily rely on imported steel and in the absence of local support, the Trump administration found that it would not be possible for America to mass produce weapons without imports.

Thus, to alter the fiscal gap between imports and exports and to ensure that the local industry can be protected and allowed to grow at the same time, the Trump administration decided to levy tariffs as high as 25^% on steel imports from the countries listed above. This led to what is often called as the American Chinese economic war.

Answer to Option B)

The US China war has brought a situation wherein countries are manufacturing less than what is optimum for them. This is because due to increased tariffs, the products are not selling well in the international markets and the domestic demand cannot cater to the increase in production. Therefore, most producers are producing at a lesser level which leads to low levels of productivity in the countries. This is often referred to as pareto inefficiency in a country.

The same can be explained with the help of a graph as follows: -

In the graph we see a situation for China, wherein it has Steel and Technological Equipment on two sides of the graph as above. The country can chose from various points on the curve i.e point A,B or C this would be considered to be efficient and in different combinations dependent upon the demand. This is the maximum and recommended level of production.

However, due to the current scenario it would have to produce at level D which is known as Pareto inefficient. This is due to reduced demand in the international market.

Part C)

In economics, comparative advantage refers to the advantage which one country has over another due to various factors such as availability of raw materials. This is due to a lesser opportunity cost which is the cost of the next best alternative.

Over the years, China has emerged as the centre of all production activities. This is because of low opportunity cost of labour. Labour is extremely cheap in china and is in abundance as the country is the most populated across the globe. As a result, production is relatively cheaper and profits can be reaped in using the production model.

America on the other hand is a capital rich country which through its technological advancements has gained an advantage over other countries.

China has been able to implement technological changes very fast and has developed indigenous methods through the help of which it has been able to limit the comparative advantage of the United States in manufacturing.

With both technology and low-cost labour, China can move much ahead to the United States in manufacturing and that is how USA loses its comparative advantage.

Please feel free to ask your doubts in the comments section.