Question

The Trump government in the US has adopted trade protectionism since the first day that president Trump came to the oval office in the white house. During 2018 and 2019, the US had increased tariffs on the majority of the imported goods from China. Meanwhile, China also retaliated by increasing its tariff on imports from the US.

1. a) What will be the impacts of the tariff on the trade volume between the US and China?

2. b) Who pay for the US tariffs on the imports of Chinese goods?

3. c) Conduct welfare analysis for the US import tariff.

4. d) President Trump blamed China for the large goods trade deficits. Explain why the goods trade deficits are not a good measure of bilateral sale balance.

5. e) Who are the winners and losers of the US-China Trade War?

Answer 1

a)In the first half of 2019,US tariffs caused 25% loss of exports and thus inflicting $35 billion loss to Chinese exports in the US market for tariffed goods.However despite the tariffs the Chinese firms were able to export 75% of their goods to US.

b) Traiffs are tax on imports .The tariffs are paid by US registered firms to the US customs for the goods they import to US.Importers pass the cost of tariff to the customers ie  manufactureres and consumers in the US by raising the prices.

c)Consumers of the importing country suffer a reduction in welfare as a result of the tariff as there will be increase in the prices of imported goods and donestic substitutes goods .So there will be reduction in consumer surplus.Producers in the importing country experience increase in welfare as a result of tariff.The increase in the price of the product in the domestic market increases producers surplus.Due to price increase there will be increase in output, increase in employment and increase in profit.The government receives revenue as a result of the tariff.

d)Bilateral trade deficits are bad because they can cause Balance of payment problem which can cause  foreign exchange shortage and the economy can be hurt.

e)Vietnam and other low cost exporters are the winners.In order to evade US tariffs ,certain companies are moving distribution from China to Vietnam. They keep their prices low and so profits are also low.US is importing 40% more from Vietnam.The European Union are the losers because they rely more on trade for economic growth and the conflict between US and China will affect their future growth.