Part 3 - Tariffs barriers to trade

Question 1

Overview of trade war between US and China:

Answer 1

• Average tariffs in the U.S imports used to be very low before the trade war started – tariffs are important to be understood as a trade police measure but usually (nowadays) they are relative low.
• Tariffs have been the main tool of US and China trade war
• Average tariffs in US inputs went up substantially overtime, starting in 2018 (solar and washing machines, steel and alum…)

Question 2

What are predictions for the United States from the simple model developed in the last lecture (one sector like for instance washing machines and perfectly competitive markets)?

Answer 2

• Price for washing machines in the United States rises. (for us consumers)
• U.S. government collects additional revenues from import tariff on washing machines.
• U.S. producers of washing machines profit. (producer surplus goes up)
• Imports of washing machines to the U.S. decline.
• Welfare effects for the United States ambiguous.
− Note that the U.S. import tariffs are introduced vis- -vis China and, in part, the European Union. Hence, the United States cannot expect a large terms of trade gain in their favor, since the U.S. is not large relative to these economic areas.

Question 3

The two most important features that our simple partial equilibrium model for tariffs does not account for are:

Answer 3

1. Reaction by trading partners called retaliation: the other country‘s response to establish new/further trade barriers (retaliation) transforms unilaterally imposed trade barriers into a trade war.
   − From a strategic point of view, it is very likely that large targeted economies will respond by also introducing or increasing trade barriers.
2. General equilibrium effects - affects only caused by the price increase (labor market and other aspects does not matter)

Question 4

Definition for the term trade war:

Answer 4

„A trade war is an economic conflict in which sovereign states raise or create tariffs or other trade barriers against each other in response to trade barriers created by the other party.“ (adapted from Business Dictionary).

Question 5

Economic effects of Donald Trump‘s trade war for the U.S. (Amitiet al. (2019) study)

Answer 5

1. no effect of the tariffs on prices received by foreign producers, even though the US is a large economy. Means that if the foreign price does not fall, there is a reallocation of the decrease in consumer surplus to the government revenues independent of the inefficient loss.
2. No terms of trade gains because the prices does not fall.
3. So, this study finds welfare losses for the United States between $8.2 billion and $23.8 billion for the year 2018. NEGATIVE.
4. Partial equilibrium model by Amitiet al. (2019) yields a welfare loss of at least $8.2 billion in 2018.

Question 6

Economic effects of Donald Trump‘s trade war for the U.S. (Fajgelbaumet al. (2020) study)

Answer 6

1. strongest protections trade policie move by the US government ever since the Great Depression and the “Nixon Shock” - many products have been affected because of large volume of imports into the US.
2. U.S. import tariffs increased from 2.6% to 16.6% on over 12,000 products covering over $300 billion or over 12% of annualU.S. imports
3. US trading partners retaliation was significant - Tariffs on U.S. exports increase from 7.3% to 20,4% on over 8,000 products covering close to $130 billion or about 8% of annual U.S. exports.

Question 7

Take away of Tariff Increase on U.S. Exports vs Import by Region

Answer 7

Winners from that trade war or potation winners in terms of reagions are different regions than regions that are potential losers of the trade war.

Strongest import protection is Rust Belt states.

Main focus of retaliations were in Midwestern and counties that voted in favor of Trump.

Question 8

EUA retaliation measures:

Answer 8

The European Union seems to be fairly successful in not targeting products, where the United States is the dominant supplier. This is more difficult for China due to current U.S.-Chinese trade structure.

Hence, price increases due to the imposition of retaliatory tariffs are expected to be smaller in the EU than in China.

Question 9

(Flaaen et al. (2019) analyse the price effect of U.S. import restrictions on washing machines.

Answer 9

1. Price of washers increased by nearly 12 percent in 2018.
2. Interestingly, the price of dryers–not subject to new tariffs – increased as well, leading to a tariff elasticity of consumer prices above one.
3. Increased U.S. consumer costs: Median price increase of about $90 per unit or total additional consumer costs of over $1.5 billion per year.
4. Market structure: U.S. washing machine market „moderately concentrated“ (so some where between the two market structures considered in our simple partial equilibrium models for tariffs).

Question 10

Tariff elasticity of consumer prices measures…

Answer 10

the price changes encompassing the overall bundle of goods available to consumers (both imported and domestically produced) relative to the average change in tax applied to these goods via import tariffs.