Question

If you’ve paid attention to the general level of prices of goods and services over time, it should come as no surprise that rising oil prices have an impact on world trade, specifically that higher transport prices serve to act as a de-facto tariff on goods that cross borders. In your opinion, what effect do you think high oil prices could have on U.S. trade with distant countries like China, and will it lead to “Made in America” being the choice of American consumers again?

Answer 1

High oil prices are one of the chief component for the rise in the price of goods and it affects the international trade as well. Due to rise in prices, price level of goods coming to the USA from countries like China, should increase. But It is well understood by the Chinese companies that rise in price, will put them out of competition. So, these companies will evaluate the elasticity of demand and if demand is elastic, then they will absorb the price at the cost of thinning of the profit, slight burden will be passed to the consumers if any. If demand is inelastic and there is no close substitute, then the price of these goods will increase. The similar efforts will be done by the US companies when they export their goods to the other countries like China. During this process, if the value of imports increases more than the value of exports, then current account deficit increases and vice versa.

American companies will like the product made in America, when price of imports increase significantly than that of domestic products and quality does not change. But, it will happen to the limited extent, as there are menu cost apart from loosing the  consumer base that restricts the volatility in price of imports.