Question

The United States instituted tariffs (increase in price of Chinese goods imported into the US) on China selectively on 7/6/18 of 10% on ultimately $50billion of goods.

China retaliated in kind by imposing tariffs (increase in the price of US goods imported into China) on US on the same day by the same amount

On 5/15/19, The US increased the amount of the tariff to 25% and expanded the list of Chinese goods covered by the tariff.

Chinese responded in kind by the amount of the tariff and the list of goods covered.  

Using the production possibilities model, and making the assumptions that the US and China are the only countries in the world, and making the assumption of constant costs in production, and assume also that the 2 countries produce only 2 goods: Soybeans and Consumer goods, with the US having a comparative advantage in Soybeans, China having a comparative advantage in Consumer Goods, explain what you would expect to happen once these tariffs are imposed.  

Please include in your discussion, what effect, if any, these tariffs (trade war) would have on the costs of production, level of production, level of consumption in each country.

Finally, relax the assumption about US and China being the only two countries in the world. If other countries are allowed to trade with either China or the US, what would happen to the level of production and price of each good? Be sure to note all the assumptions you are making in your analysis. Your answers need not be lengthy, if you would like to include graphs that is ok.

Answer 1

I have given hand-written solution to maintain continuity on my thinking so I can provide you more logical and high quality content so please pardon me for the hand written answer

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