Question

1. President Trump continues to engage in a “trade war” with China.

   1. (a) Briefly explain what it means to say we are engaged in a “trade war” with China and what outcome the U.S. is hoping to achieve.

   2. (b) Discuss the overall effects of the “trade war” on (i) U.S. firms, (ii) U.S. consumers, and (iii) net U.S. welfare. Be sure to make appropriate distinctions regarding different types of firms in the economy.

   3. (c) As an economic policy adviser to the President, would you support protectionist policies? Or, would you advocate for freer trade? Are there certain conditions or other policies that must be paired with free-trade deals before you would recommend supporting them? Briefly justify your answer using appropriate economic analysis. A well-justified answer should ac- knowledge arguments on both sides of the issue.

Answer 1

a. Engaging in trade war means both the countries raising tariff on each other imported goods into the countries for promoting their domestic firms and also increase employment level. This war started with the U.S. raising the tariff rate on Chinese imported goods and since then both has been raising tariffs on each other imported goods. The U.S. is hoping to increase their domestic production levels and also increase employment within the nation.

b. This trade war is promoting U.S. firms as they have increased their domestic production levels because of fall in imported Chinese goods coming in the nation. Thus, firms who are competing with the Chinese made imported goods are the gainers from imposition of tariff. The U.S. consumers will lose as Chinese goods are cheaper as compared to the domestically made U.S. goods. Thus, consumer surplus will fall. Net U.S. welfare will decline with the imposition of tariff because tariff leads to deadweight loss.

c. Economic policy advisers are advocates of freer trade policy. But protectionist measures are advisable in the short run when the firms are in the nascent stage and need protection from foreign nations. This trade war between US and China has not only resulted in decline in level of GDP in U.S. and China but overall world GDP also. Thus, it is advisable in the short run but not in the long run.