Question

US can manufacture semiconductors at $45 a piece. The supply curve is horizontal at $45.

Canada can manufacture them at $ 43 a piece.Their supply curve is horizontal at $43.

China can manufacture them at $40 a piece.Their supply curve is horizontal at $40.

The demand for semiconductors is given by P = 100-0.1 Q.

Fill in the following table.

Action	Home Price	Consumer demand	Domestic supply	Imports	Importing country	Trade creation	Trade diversion
USA imposes 20% tariff on import prices				y		/	/
USA reduces tariff to 10%				x		Change of imports, x-y >0, creation, <0 trade diversion
USA reduces tariff to 0%
US re-imposes tariff of 10% on China and enters into a free trade agreement with Canada

Answer 1

Protectionism is the economic policy to restrict trade through tariff, quotas and other regulations that burden foreign producers; not domestic producers. A tariff is a tax on import that will increase domestic production and decrease domestic consumption. Tariff causes consumer to switch to relatively cheaper domestic goods or to drop-out of the market. Tariff also encourages domestic producers to increase their output because demand switches from foreign to domestic goods.

After the 20% tariff price of Canada is 1.2*43=51.6 and that of China is 1.2*40=48. Then US will produce the entire market quantity at home. The equilibrium quantity at P=45 is Q=550

After the 10% tariff price of Canada is 1.1*43=47.3 and that of China is 1.1*40=44. Then US will import the entire market quantity from China. The equilibrium quantity at P=44 is Q=560

After the 10% tariff price of Canada is 43 and that of China is 40. Then US will import the entire market quantity from China. The equilibrium quantity at P=40 is Q=600

After the 0% tariff price of Canada is 43 and after 10% tariff price of China is 1.1*40=44. Then US will import the entire market quantity from Canada. The equilibrium quantity at P=43 is Q=570.

The results are summarized below

Action	Home Price	Consumer demand	Domestic supply	Imports	Importing country	Trade creation	Trade diversion
USA imposes 20% tariff on import prices	45	550	550	0	NA	NA	NA
USA reduces tariff to 10%	44	560	0	560	CHINA	560	NA
USA reduces tariff to 0%	40	600	0	600	CHINA	40	NA
US re-imposes tariff of 10% on China and enters into a free trade agreement with Canada	43	570	0	570	CANADA	0	30