Question

For the past two years, the United States has imposed tariffs (tax) on imports from China. According to the theories we have studied so far in the course, identify the losers and winners of this trade restriction in the United States. Why does economic theory predict that the United States as a whole loses from the trade restriction? Be sure to answer the question based on what you have learned in the course.

Answer 1

US imposition of tariffs on China:

Diagram in based from US perspective:

a) If US imposes tariffs of China, it will raise the price Chinese customer have to pay to buy US based product. Assume price before tariff is P, after tariff it rises to P_T.

Consumer surplus before tariff = A + B+ D + E + F + G

Producer surplus before tariff = C

Consumer surplus after tariff = A + D

Producer surplus after tariff = B + C

Before tariff, as Chinese customers were importing goods from US, a cause in tariff will reduce Chinese consumer surplus but raise producer surplus as producers in China will produce more as consumers there, will prefer to buy from China itself.

b) US will loss from the trade as the portion F in the diagram is deadweight (loss of social optimum quantity produced) loss from the tariff imposed. While China will not face any deadweight loss from rising their domestic production as they will optimize their natural resources to produce that good. There could be a possibility that Chinese resources are wasted which are helpful in producing that product, if they keep on importing from US.