The Impact Of Import Tariffs On Consumer Surplus, Producer Surplus, And National Welfare

The Impact of Import Tariffs on International Trade

lease read the following article in the Economist on March 24, 2018: “Why tariffs on steel and aluminium are easier said than done”. The article can be found following the assignment’s questions.
Please answer the following questions:

1. The article analyses the possible effects of the decision by President Donald Trump to impose tariffs on steel and aluminium imports. Note that the US can be considered to be a large importer of steel. Now assume that the United States trades only with Canada and imports its steel from Canada. Please provide a detailed welfare analysis of the impact of the US tariffs on US welfare. In other words, please analyze the impact of US tariffs on the US steel
producers, US steel consumers (such as the ones mentioned in the article) and US government tariff revenue. Also, please analyze the impact of the US tariffs on Canada’s welfare.Hint: in order to answer question 1 you can use the concept of the consumer surplus, the producer surplus and government tariff revenue.

2. The article argues that the Trump administration may not achieve its goal of limiting its aggregate imports of steel with its tariffs because similar measures on restricting steel imports in the past were not successful. Specifically, the article mentions the tariffs on steel imports imposed by George W. Bush in 2002:“Exemptions for Canada, Mexico, Israel and Jordan when George W. Bush imposed tariffs on steel imports in 2002 allowed the value of their exports to America to surge by 53%.”

From the UN Comtrade Database please use the real data of US steel imports from Canada,Mexico, Israel and the world to evaluate if this statement is justified by the data.Note the following chronology of the 2002 US steel tariff, which is not mentioned in detail the article. On March 5, 2002, the United States placed tariffs on imported steel. The tariff was effective on March 20. The United States lifted the tariff on December 4, 2003. Canada and Mexico were exempted from the tariffs because the tariffs are a violation of North American Free Trade Agreement of which United States, Canada and Mexico are members. The temporary steel tariffs are about 8% to 30%. Also not that the typical steel tariff at the time was usually less than 1 percent.

A few important notes for data collection:
(i) You are asked to get the data from UN Comtrade Database and not from any other source. It is the purpose of this exercise to ask students to learn how to collect data from UN Comtrade Database, the largest dataset of international trade at the country-sector-product levels. 

(ii) In order to evaluate the statement above please collect the data of US steel imports from the three countries (Canada, Mexico and Israel) and from the world from the US Comtrade Database by taking the following steps:
Step 1: use the following link to log into the UN Comtrade Database
Step 2: click on Legacy Annual under Legacy.
Step 3: select Express Selection under Data Query
Step 4: get the data by making the following selections:

For Classifications choose SITC Rev. 2.
For Commodity Codes/Text type 67. Note that SITC Rev. 2 classification 67 denotes Iron and steel.
For Reporters Codes/Text use Lookup to select USA (UN Country code: 842).
For Partners Codes/Text use Lookup to select World, Canada, Israel and Mexico (UN country codes: 0, 124, 376, 484). If students also choose Jordan (UN Country code 400)as a partner they find that the value of the United States steel imports from Jordan is relatively small and that UN Comtrade data on US steel imports from Jordan is only available for three years: 1988, 1989 and 2000. That is why, students only have to evaluate the statement using data on US imports from these three steel exporters: Canada, Israel and Mexico.

For Years please enter 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006 and 2007.
Select Import.
Download the data. Note that the Excel file you download from UN Comtrade has 11 columns: Year, Reporter Code, Trade Flow Code, Partner, Classification, Commodity Code, Quantity Unit Code, Supplementary Quantity, Netweight (kg), Value and Estimation Code. Information on Year, Reporter Code, Partner Code and Value (in USD) is that you need to do Assignment’s .

In this case, the red line shows the quantity of imports and export. In the case of the US imposing a tariff on the import of steel, it may lead to an increase in the price of the good in the domestic market and a decrease in the price of the rest of the world (Slopek, 2018).

In case the price rises to PIM in the importing country and the price in the exporting country falls to PEX, the tariff rate will be equal to the distance represented by the yellow line if it is a specific tax, in case it is an ad valorem tax, the tariff rate effect will be represented by the distance as shown by the green line (Montgomery, 2015).

In the case of welfare effects of the tax, for the US, the consumer surplus will be represented by – (A+B+C+D)

The producer surplus will be represented by A

Government revenues will result from C+G

National welfare will result from G – (B+D)

The consumers in the US will experience high prices and therefore suffer from a reduction in wellbeing as a result of the tariff. The domestic prices of the imported goods and domestic substitutes will increase leading to a reduction in the consumer surplus in the market (Huang and Yu, 2016).  The producers in the US will experience an increase in their welfare, this is because the increase in the prices of the steel will also spill over to the domestic market. Further, the tariff will stimulate the domestic market thereby increasing the output of the domestic market and possibly the national GDP.

More firms may look to enter the market or expand their production increasing employment opportunities ( McManus an Schaur, 2016). The government will receive tariff revenues from the tariff which the country may use to increase its foreign reserves. Overall, a tariff implemented by the US on the import of steel could possibly lead to an improvement in the national welfare. One influencing factor is the size of the country i.e. since the US is a large country, it will have a positive effect on welfare. Additionally, if the tariff is not set too high, the national welfare will not suffer(Fieler and Harrison, 2018)

In the case of Canada, the consumer surplus will be represented by e

Producer surplus will be represented on – (e+f+g+h)

There will be no government revenues

Consumer and Producer Surplus in the US and Canada

National welfare will be – f+g+h

The consumers will experience a consumer surplus because of a decrease in the domestic prices as a result of the glut in the domestic market as a result of less exports to the US. On the other hand, the producers in Canada experience a reduction in the producer surplus due to the decrease in price in the domestic market. Additionally, they will face a decrease in the output which means less employment opportunities in Canada (Felbermayr and Larch, 2015).

The next effect is a reduction of welfare in Canada

Overall in the world, there will be a negative effect on the world welfare. This means that the import tariff has more consequential effects on the general world welfare compared to the two trading countries as it results in lower world production and consumption efficiency (Caliendo and Parro, 2015).

Question 2.

The statement claims that the tariffs might have little or no effect on the steel imports or may lead to an increase in the exports of the products to the US. Price tariffs are taxes which are imposed on a good when they are imported into another country. They make the good more expensive that it should be in order to cater for the tariff charge. Since the imported goods become expensive, people will often result to the use of locally available substitutes since they will be found to be cheaper. Tariffs often affect international trade between countries.

In the case of Canada, the steel imports seem to have been affected by the steel tariffs since there was a decline in the steel imports to the US between 2002 and 2003 as seen on the graph. 

In the case of Israel, the effect of the steel tariffs is evident since there is a plateau in the steel imports from Israel between 2002 and 2003 before the steel imports increased later on after the tariffs were lifted. 

In the case of Mexico, the effect of the steel tariffs is evident since also there is a plateau in the steel imports from Mexico between 2002 and 2003 before the steel imports increased later on after the tariffs were lifted.The article argues that the Trump administration may not achieve its goal of limiting its aggregate imports of steel with its tariffs because similar measures on restricting steel imports in the past were not successful.

Since there is evidence of decline or plateau in the steel imports between 2002 and 2003, the Trump administration may be successful in its goal of limiting aggregate imports of steel with tariffs since previous measures by George Bush were effective to some level. On a world level, there was a decrease in the steel imports to the US between 2002 and 2003. This could be attributed to the tariffs imposed by George Bush.

There is also an evidence of the performance improving significantly after the tariffs were lifted. In as much as Canada and Mexico were part of the North American trade agreement, the trade tariffs also influenced trade from thee countries which were meant to be protected from the tariffs. This could be because of the perception that imports of steel commodities will be expensive whether or not they may not have a direct tariff charge attached to them (Erceg and Raff, 2017).

Additionally, the second part of the statement is less likely to be true since there was a decline in the imports from the data, there could not possibly have been a surge in the exports to America at the time. It is important that the government authorities in charge of international trade become aware of the influence of tariffs on the imports of the country and put historical performances in consideration when making policy decisions which may influence the local industries as well as the trade relationship between the US and other countries, especially countries with which the US has trade agreements since it could violate terms of the agreement inadvertently.

References

Caliendo, L. and Parro, F., 2015. Estimates of the Trade and Welfare Effects of NAFTA. The Review of Economic Studies, 82(1), pp.1-44.

Erceg, C., Prestipino, A. and Raffo, A., 2017. The macroeconomic effects of trade policy. Federal Reserve Board (March)(unpublished manuscript).

Felbermayr, G., Jung, B. and Larch, M., 2015. The welfare consequences of import tariffs: A quantitative perspective. Journal of International Economics, 97(2), pp.295-309.

Fieler, A.C. and Harrison, A., 2018. Escaping Import Competition and Downstream Tariffs (No. w24527). National Bureau of Economic Research.

Huang, Y., Jennings, R. and Yu, Y., 2016. Product market competition and managerial disclosure of earnings forecasts: Evidence from import tariff rate reductions. The Accounting Review, 92(3), pp.185-207.

McManus, T.C. and Schaur, G., 2016. The effects of import competition on worker health. Journal of International Economics, 102, pp.160-172.

Montgomery, W.D., 2015. Oil prices, energy security, and import policy. Routledge.

Slopek, U.D., 2018. Export Pricing and the Macroeconomic Effects of US Import Tariffs. National Institute Economic Review, 244(1), pp.R39-R45.