Question

Be sure to address each point in the question and explain your argument carefully.

1. What do you mean by resource allocation effects of tariffs? Why do tariffs create deadweight losses? What are the long-run costs of tariffs?

2. Under Trump administration, the United States imposed high tariffs on imported solar panels and washing machines in the early 2018. It has grown into a full blown “trade war” between the U.S. and China. What is the intended goal of Trump tariffs? What do you think about the consequences of this trade battle?

Answer 1

1) The free market is governed by the supply and demand forces. The quantity and price at which buyers agrees to buy that products and supplier agrees to sell it is called as the equilibrium price. The market forces or 'invisible hand' theory ensures that the resources are allocated efficiently and so the society can have optimal welfare.
However, any intervention such price ceiling, price floor or for that matter tariff and quota distorts the market forces and that means there won't be efficient resource allocation in the market.

If any country is importing a product and as a protectionist measure if that country imposes tariff on that good then the consumers will have to pay more for that product. They will have to allocate more resources for that product if it is essential such as fuel. This will negatively affect their consumption on other goods. This outcome may not be intended but it will be witnessed.
A higher price of the product because of tariff will lower the demand will create a dead weight loss. An out of equilibrium or inefficient allocation of resources means the society will have overall a welfare loss.
The protectionist measures such as tariffs and quotas are quite expensive in the long run because it affects consumption and welfare of the society. Further, it protects the uncompetitive firms from the competition at the cost of common people.

2) The Trump government has imposed the tariffs on China made solar panels. The US companies specially which are in the manufacturing are unable to compete with cheaper products from China and elsewhere. The US labor is quite costly and China can produce the same product with fraction of labor cost. Another factor is that China has kept its currency Yuan artificially undervalued against the USD which allows to export cheaply.
An undervalued currency also results in depressed wages and that is why Trump Government imposed the tariff on Chinese products. The intention of such move is to protect the US domestic production.

The imposition of tariffs has started a trade war between the two countries. The effect of such trade war will be very much negative for the world economy. The US cosnumers will be at the receiving end as they will have to pay more and that will affect their cosnumption. Chian could also see a big drop in export as its internal market is not that much robust and it depnds upon export. However, there is a need of rational policies from China by allowing appreciation of its currency.