Question

Critically evaluate the trade dispute between the United States (US) and European Union (EU) and its impact on international trade and welfare. The student needs to analyze the welfare effects (producers, consumers, government) and trade effects from the trade dispute.

Answer 1

United States is the largest goods trade partner of the Europian Union with bilateral trade of about $615 billion annually.

However, the exports from the EU amounted to $384 billion whereas imports were worth about $231 billion. President Trump has accused the countries in the European Union of having large trade surplus with the US. The US government imposed a 25% tariff aluminium and steel imports from all across the world, inlcuding the EU. Canada was exempted later from this tariff.

All these activities has heated up a debate about a possibility of trade war of the United States with European Union.

International trade is generally based on comparative advantage of the countries. A country that has comparative advantage in producing specific goods, should produce and export those goods and should import those goods where it has relatively comparative disadvantage. US and the European Union are industrially advanced countries. However, the share of the services sector in US's economy is higher than that of EU. That is why US exports services sector related products much more than manufacturing related products.

The comparative advantage based international trade is very efficient and leads to welfare of all the countries, producers, consumers who have to pay right amount for the products and also the government. Due to imposition of trade barriers such as tariffs, trade will reduce leading to ineffiecient production of goods and services which inevitably leads to loss of welfare for all.

Thus, we can say that the reduction in trade resulting from trade dispute will lead to welfare loss of all.