Trade Tariffs Effects on Domestic and Foreign Markets

Trade Tariffs

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Trade Tariffs

        A trade tariff is a tax placed on imports and commodities that enter a country or a region (Mankiw, 2014). Trade tariffs are placed by policy makers for various reasons like protecting domestic industries, stimulating the domestic industry and raising revenues for the government (Mankiw, 2014). Tariffs have several impacts on both domestic and foreign markets. Tariffs are disruptors of free flow of goods in international trade and lead to distortions in competitive markets.

        Supply and demand is a microeconomic model of price determination in market. The relationship between supply and demand determines the goods that are demanded in a market and the price at which they are demanded (Mankiw, 2014). Consumers will demand and buy more of a good as the price of good decreases which is indicated by a downward sloping demand curve (Mankiw, 2014). Suppliers of a good are willing to produce more of a good as the price of that good increase which is indicated by an upward sloping supply curve. In a perfectly competitive market equilibrium is when production matches consumption and the right amount of goods are sold at the right price (Mankiw, 2014). Equilibrium is indicated on a point where the supply curve and the demand curve intersect as illustrated in figure 1 below.

                                             [pic 1]

Figure 1: Supply and Demand Curve (Beggs, 2017)

        The introduction of a trade tariff distorts the supply and demand relationship and disrupts equilibrium. Tariffs raise the prices of goods and lowers demand (Goldberg & Pavcnik, 2007). The tax imposed on imports will increase the price of that good for consumers and manufacturers who use that good. Therefore the imposition of a tariff will lead to a shift in equilibrium that results in higher prices and lower demand for a good.

                               [pic 2]                                     

Figure 2: Effect of a tariff on equilibrium (Wikipedia, 2018)

In 2018 the United States of America imposed a trade tariff on steel and aluminum. The country imposed a 25% tariff on steel and a 10% tariff on aluminum on countries worldwide except for South Korea, Argentina, Brazil and Australia who negotiated for exemptions (Cox & Russ, 2018). The reason for the imposition of this tariff was to protect the domestic steel and aluminum industries (Cox & Russ, 2018).

        This tariff is expected to have various microeconomic impacts. The current prices of steel and aluminum () are expected to rise due to the tariff to. This increase in prices will lead to a reduction of steel and aluminum imports from Quantity of imports without tariff to Quantity of imports with tariff. Domestic producers of steel and aluminum will gain from reduced imports and the increased purchase of domestic steel and aluminum (Domestic surplus). Government will also gain from the tariff due to increased revenue from the tariff (Tax revenue). Consumer welfare will be reduced to the increased prices of steel and aluminum as consumers and steel and aluminum consuming industries will demand less steel and will lead to a loss of jobs in these industries.[pic 3][pic 4]