Question

As Tariffs Bite, Get Ready for a 1970s-Style Supply Shock

By Greg Ip | Jun 06, 2019

QUESTIONS:

	1. What was the 1973 oil embargo? What were the main policy goals in its implementation? Was the embargo ultimately successful in achieving these goals?
	2. Briefly describe how the 1973 embargo affected the U.S. economic growth rate, inflation rate, and unemployment rate. Include a well-labeled aggregate supply/demand figure to depict these changes to U.S. economic output and price levels. What other large effects did it have on the economy, either positive or negative?
	3. Briefly explain the differences in how the U.S. economy was affected by the 1973 oil embargo with how it is likely to be affected now by the current tariffs imposed on Chinese imports.
	4. Considering the effects of the oil embargo on the U.S. economy, are you in favor of U.S. tariffs on Chinese imports? Why or why not?

Please help me with all these questions.

Answer 1

1. The 1973 oil crisis started in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries proclaimed an oil embargo. The embargo was targeted at nations perceived as supporting Israel during the Arab-Israeli War. The initial nations targeted were Canada, Japan, the Netherlands, the United Kingdom and the United States with the embargo also later extended to Portugal, Rhodesia, and South Africa. By the end of the embargo in March 1974,
the price of oil had risen nearly 400%, from US$3 per barrel to nearly $12 globally; US prices were significantly higher. The embargo caused an oil crisis, or "shock", with many short- and long-term effects on global politics and the global economy.
It was later called the "first oil shock", followed by the 1979 oil crisis, termed the "second oil shock." Since Israeli forces did not withdraw to the 1949 Armistice Line, the majority of scholars believe the embargo was a failure but some believed that the embargo remade the international economy.

2. The Middle East crisis developments had a strong impact on the United States’ GDP. GDP growth fell by 0.23 % in 1980 after having been at 3.1 % and 5.5 % in the previous years. A similar development could be observed in US private consumption, as a major pillar of the US economy. Private consumption dropped by 0.28 % in 1980 after growth rates of between 2 % and 4 % previously. Unemployment in the US rose from 5.8 % in 1979 to 7.6 % in 1981 and reached its peak at 9.7 % in 1982. Inflation skyrocketed from 7.6 % in 1978 to 13.5 % in 1980. The effects were mostly negative.

3. The oil embargo was a different situation than the current US-China trade war because, at that time, the oil was the only commodity that the Arab nations had which they could use as a weapon. But in today's case, the US imposed tariffs on over 1,300 categories of Chinese imports including aircraft parts, batteries, flat-panel televisions, medical devices, satellites, and various weapons. Similarly, China retaliated by imposing tariffs on 128 products it imports from America, including aluminum, airplanes, cars, pork, and soybeans (which have a 25% tariff), as well as fruit, nuts, and steel piping. In this trade war, the US and China are bickering and won't go to actual war as the cost of the war would be unimaginable. In 1973, the US actually supported Israel and entered the war by siding with Israel.

4. No, I am not in favor of US tariffs on Chinese imports, because they are doing the same to the US and China is not a small GDP, but the future superpower. Employing unilateral tariffs is a self-defeating approach and the US administration should instead pursue a coalition-based trade strategy.  The United States experienced declines in real exports and GDP.  For the US, the monetary stimulus is beginning to wear off, oil prices are elevated, and political risks are on the rise.