Question

What are the impacts of some current policy proposals concerning tariffs and supply chains in the context of economic theory? Why is the policy is proposed or implemented, what does it address, what does theory say about what it will do? and who will win or lose from such a tariff? (which is a tax, hint hint).

Answer 1

Ans.
Lets us first understand what tariffs are:
Tariffs are taxes that a government levies on imported goods. The primary objective of tariffs is to protect domestic industries that produce the same or similar goods.
They may also aim to reduce a trade deficit. Tariffs reduce the demand for imported goods by increasing their price above the free trade price.
The current proposals of the US government to increase the tariffs will have significant impact. US is the large importer of the products and can exercise some influence on price in the world market.
When a large country like US imposes a tariff, the exporter reduces the price of the good to retain some of the market share it could lose if it did not lower its price. This reduction in price alters the terms of trade and represents a redistribution of income from the exporting country to the importing country.
So, as per the economic theory it is possible for a large country like US to increase its welfare by imposing a tariff if
1) its trading partner does not retaliate and
2) the deadweight loss as a result of the tariff is smaller than the benefit of improving its terms of trade.
However, there would still be a net reduction in global welfare—the large country cannot gain by imposing a tariff unless it imposes an even larger loss on its trading partner.
The welfare effects can be summarized as follows:
Consumers suffer a loss of consumer surplus because of the increase in price.
Local producers gain producer surplus from a higher price for their output.
The government gains tariff revenue on imports
The net welfare effect is the sum of these three effects.