In: Economics
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 |
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USA reduces tariff to 10% |
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USA reduces tariff to 0% |
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US re-imposes tariff of 10% on China and enters into a free trade agreement with Canada |
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 |