Question

In 2017 the U.S. imported approximately $14.5 billion in household appliances from China, including about 21 million washing machines.

1. In January 2018, the U.S. placed a 20 percent tariff on imports of washing machines from China (technically, the tariff is 20% on the first 1.2 million units and 50% on any additional units). i) How does this tariff affect the price of Chinese-made washing machines in the U.S.? ii) Who does this hurt and why?
2. In 2017 the U.S. exported $20 billion in agricultural products to China, including $12.4 billion in soybeans. The Chinese government retaliated against U.S. tariffs by placing a 28 percent tariff on U.S. soybean exports. i) What affect does this tariff have in terms of U.S. exports of soybeans to China? Why? ii) Who does this hurt?

Answer 1

1) The tariff imposed on Chinese washing machines increases its price. New price of washing machines in US will be P'=120P/100 =1.2P for first 1.2 million units. Above 1.2 million units, price becomes 1.5P.

As a result, imports falls.Let number of imports be imports be Q = 21 million initially and Q' is the number of units after tariff over 1.2 million units..

Then, 1.2P*1.2 + 1.5PQ' = PQ

or, 1.44P+1.5PQ'=PQ

or, 1.44+1.5Q'=21 million

or, Q'=(21-1.44)/1.5 = 13.04 million

Total imports = 13.04+1.2 million = 14.24 million washing machines.

As imports falls in US, exporting country China gets hurt as its export falls. This will lower net export of washing machines in China (21-14.24 = 6.76 million) . This will lead to lowering of China's GDP.

2) Now, with a tariff of 28% on US exports of soybeans to China , the new import of soybeans in China falls to (100-28)*12.4/100 = $8.9 billion. Thus, the export of soybeans from US falls by 12.4-8.9 = $3.5 billion.

This hurts US economy as its net exports falls by $3.5 billion thereby, lowering US GDP.