A Comprehensive Analysis of the USA Trade Policy and its Strategies

This report provides an in-depth analysis of the USA's trade policy, focusing on its objectives, strategies, and the economic theories that underpin it. The paper examines the rationales behind the policy, particularly in addressing challenges such as economic recession, unemployment, and trade deficits. It explores the application of import substitution strategies and the Heckscher-Ohlin model to support the policy's goals, emphasizing the importance of technological exports and the impact of tariff mechanisms. The report further discusses the implications of trade regulations, including the North American Free Trade Agreement (NAFTA) and trade disputes with China, and analyzes the effects of tariffs on the USA economy using graphical representations. Additionally, it considers the aggregate supply-aggregate demand model and the concept of factor endowments to evaluate the impact of the trade policy on employment and investment, concluding with a discussion on the Heckscher-Ohlin model's application to the USA's comparative advantage in technological products and its impact on trade balance and consumer consumption.

Running head: THE USA TRADE POLICY
The USA Trade Policy
Name of the Student
Name of the University
Author Note

1THE USA TRADE POLICY
Executive Summary
The objective of the paper is to find out the rationales of the USA trade policy. The paper has
analyzed two popular international trade theories to support the objectives of the recent trade
policy. Import substitution strategy and Hecksher-Ohlin models are discussed in this paper. The
first theory is aimed at supporting the domestic economies as compared to the foreign economy.
Tariff imposition or quota restrictions are the popular applications of the import substitution
strategy. On the other hand, Hecksher-Ohlin model illustrated the effective allocation of the
factor endowments for production of two commodities. The model states that the USA economy
should emphasize on the export of the technological products as it is a capital-intensive country.

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Table of Contents
Introduction......................................................................................................................................4
Discussion........................................................................................................................................4
Reference.......................................................................................................................................12

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Introduction
The discussion of the current topic is focused on the recent trade policy adopted by the
Trump Administration. In general, the USA trade policies are aimed at overcoming the
challenges of the economic recession, unemployment, trade deficit and poverty. The USA
economy has incurred huge expenditure on the import goods. On the contrary, the export
earnings have experienced a sharp fall due to emerging trade dispute in the international market.
Apart from that, excessive import expenses on the defensive goods and services have lowered
has surpassed the export earnings from the technology sector. Moreover, significant contribution
of the agricultural sector to the country’s employment level is expected to widen the trade deficit
gap. Considering the fact, the USA government has formed a new trade policy focusing on the
export sector and optimum use of technology sector which is regarded as the driving source of
the USA economy.
Discussion
According to the current USA trade policy, the government is asked to focus on the
export of the advanced technological products rather than on the military equipment. The
advanced technology refers to the use of Machine Learning and Artificial language programs.
Meanwhile, the country is advised to downsize the import of agricultural products. The economy
currently imports two-third of the agricultural products, including cocoa, coffee, rubber etc. from
the foreign countries. This policy can be explained with the help of Heckscher –Ohlin model.
Labor and capital are the two principle factors of production. The model illustrates that factors
which have higher relative price will be intensively used. The monetary returns of the factors are
determined by its marginal production of labor and capital. The USA economy is capital-
intensive and follows free trade policy. Therefore, the USA has a comparative advantage in the

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technological products than the agricultural products at the autarky situation. The country
involves in the trade to meet the demand for the scared resources. After entering into the
international trade, it can negotiate with its trade partners to keep a stability of trade balance
(Orefice 2017). As far as data is concerned, the estimated trade deficit in 2017 is worth of $811
billion and the export contribution to GDP is 13% and import expenditure accounts for 16% of
GDP. This surpassing effect of import is the emerging concern for the USA economists.
Hence, the primary goal of the USA policy is aimed at introducing trade regulation
policies in order to support the local exporters. The economic theory suggests that policymakers
can impose trade restrictions to control the influencing factors associated with the external
economy. North American Free Trade Agreement (NAFTA) is regarded as a remarkable trade
action of the Trump Administration. The USA is allowed to do trade freely with Mexico and
Canada under NAFTA (Magee 2019). The objective of the free trade agreement is to augment
the trade volume. However, relaxation in trade regulation may exploit the trade relation with the
trade partners. The recent trade strife with China is a major economic issue for the USA. The
Chines government is accused of fraudulent trade act and misuse of the intellectual property
rights.
Tariff mechanism
Considering the negative impacts, the Trump administration has raised the tariff rare on
the imported goods from China (Crivelli 2016). Imposition of tariff makes the imported goods
costlier for the domestic consumers, resulting in that demand for the import goods will fall. The
trade protection theory can be explained through following diagram.

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Supply
Demand
Price
Quantity
World price
Pt (Post-tariff)
Pt
P1
P2
Q2 Q3Q4 Q5Q1
Figure 1: Implications of tariff on the USA economy
Source: (as created by the author)
A fundamental mechanism of tariff is to promote the import substitution strategy. This
acts as a form of trade protection for the infant industries. It offers sufficient opportunities to the
domestic producers to cope up with the international competitive market. The economic return of
scale may get enhanced lowering the cost of production (Etro 2017). The figure 1 measures
quantity along with the horizontal axis and price along with the vertical axis. The equilibrium
market price is determined through the intersection point of the upward slopping supply sure and
downward slopping demand curve. P1 represents the domestic price in the absence of tariff and
P2 is the international price. In this case, domestic consumers will get benefit as they need to pay
comparatively lower price for the imported goods (Choi and Lim 2018). This cuts down the
demand for the domestic goods and enhances the quantity demand for the imported goods from
Q1 to Q3, however, the quantity supply decreases from Q1 to Q3.

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Being faced this potential loss in the domestic market, the government applies tariff
policy. Imposition of tariff raises the product price from P1 to Pt. Henceforth the consumer will
have to pay high as to purchase the goods, which in turn helps the government to acquire
revenue. The highlighted portion of figure 1 represents the government revenue. In response to
high price, the demand will decline from Q3 to Q, whereas, domestic production expands from
Q2 to Q4. This further implies that higher tariff rate equates the domestic price with the sum of
import tax and international price. From the short-run perspective, tariff exploits the consumer
surplus through lower consumption and higher purchasing prices (Beshkar, Bond and Rho 2015).
Nonetheless, this will empower the domestic producers to overcome the challenges of the foreign
competitors. Meanwhile, the acquired revenue will improve the country’s trade deficit condition.
The reported trade deficit in 2019 for the USA economy is $616.8 billion, as stated by the USA
Bureau of Economic Analysis. The improvement of the trade deficit condition further brings
stability in the financial market. Financial stability is the influencing factor for the investors.
Aggregate supply – Aggregate demand model
The enhancement in the investment level contributes significant impact on the country’s
employment level. In 2014, both the fishing and forestry industry has been reported to provide
employment opportunities for two million people (Rosyadi and Widodo 2018). Nevertheless, the
current statistics reveal that contributions of these two sectors have faced significant loss in
2019. In this context, the concept of the aggregate demand and supply model can be approached
to resolve the dilemma of the employment growth (Dal Bianco et al. 2016). According to the
experts, the Trump government has pushed up the expenditure on military weapons instead of
emphasizing on the agriculture goods. Henceforth, the social benefit related to the government
expenditure is not realized by the employment section. The intersection point of the aggregate

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demand and aggregate supply curve reflects the optimum output level of the economy. This
improvement of the optimum level is only possible if both the cumulative demand and supply
show development. As a consequence of the national employment sector will be having boom
condition through the effectiveness of the market condition. In the meantime, the USA
government needs to be concerned while doing the investment process. One of the important
aspects of the international trade theory is to guide the country’s investment plan.
Factor endowment is the key parameter to judge the country’s resource allocation
program. From the perspective of the USA economy, technology is the strongest economic
resource. Data asserts that the advanced technology is the driving force of the robust economic
growth of the USA. After initiating the free trade economy, the country starts exporting
technological product. In the meantime, import of the agricultural products also increases. From
the current statistics, it is clear that the government has been continuously ignoring the
investment on the technical advancement program as to support the expenditure on the military
equipment and insurance coverage of the healthcare sector (Trinh 2016). The overall cost is
reported as $3.3 trillion in 2019. On the contrary, the economy has spent around $1 trillion for
the improvement of the artificial language and machine learning program devoted for the heath
sector. This has resulted in the huge loss for the human capital and social welfare. On this
account, the USA government has been advised to incorporate new technology into the existing
technology 9Gozgor et al. 2019). Though up gradation of technology may cause huge cost at
initial level economy will receive sustainable impact in long run.

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International Price ratio
Domestic Price Ratio
Agriculture
Technology
P
P’
B
D C
A
Hechsher –Ohlin model
Figure 2: Hecksher – Ohlin Model
Source: (as developed by the author)
As the USA economy owns advantage in the technological products, the international
piece ratio is flatter than the domestic price ratio. This implies that the USA economy produces
more technology goods rather than agricultural goods (Kapur 2015). The government continues
to allocate the resources till international price ration equals to the domestic price ratio. In this
way, the economy will be able to maintain the trade balance through equating the import with the
export. Following this, the USA citizens will be able to improve the consumption of both
agriculture and technology. From figure 2, it can be asserted that the USA economy would be
able to import more agricultural products in exchange of export of the advanced technology
(Bekkers and Stehrer 2015). This theory allows the USA to allocate the abundant capital to
produce more technological product. Here, the agricultural products will be produced at B where

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relative world price gets equal to the domestic production cost. Looking forward, the USA
economy can shift its initial production possibility frontier towards outside reflecting better
outcome for the economy.
The concept of the opportunity is the key indicator to find out the country’s comparative
advantageous position in the international economy. If USA economy finds the opportunity cost
of the technological product is higher than the agricultural products, it will continue to produce
technological products (Imbruno 2016). Opportunity cost denotes how much cost an entity will
bear in order to consume one extra unit of other goods. The principle tough of the Hecksher-
Ohlin model is evolved around the concept of the opportunity cost (Sasaki 2015). As the USA
economy faces less opportunity cost while producing technological products the domestic price
ratio steeper. The economy would prefer to keep production level at B where outcome of the
technological production is better than the agricultural production. The international trade
approach is developed with the aim of improving the trade condition of the participating
countries (Iwasa and Nishimura 2014). It is not apprehensive though for any of the economies to
exploit the resources of other economy. The agricultural sector contributes only 1% to the
country’s GDP growth. Focusing only one sector cannot result in the sustainable growth of the
economy. The policy makers should develop such a strategy which will allocate the resources
into the various sectors in an effective way (Kiyota 2014). This further leads the economy to
achieve a sustainable development in the trade sector.
Conclusion
The USA economy is regarded as the world’s largest economy following the Chinese
economy. However, the evolving trade war with China has triggered a great challenge for the
trade policymakers. The deteriorating export earnings urge immediate changes in the existing

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trade policies. The current USA trade policy is the reflection of the adoption of the import
substitution strategy. This will reduce the country’s economic dependency on the foreign
economies. In this context, the Trump administration has raised the tariff rate on the imported
goods. This turns the foreign goods expensive for the USA consumers. This will obviously lower
the demand for the imported goods and further mitigates the country’s trade deficit amount. On
the face of growing economic scarcity, trade inequality and deficit expenditure, tariff imposition
is considered as the best way to revive the economic growth. According to the conventional trade
theory, the import substitution policy brings effective outcome for long term, but not for the
short term. Further, the growing adoption of the advanced technology reflects the country’s focus
on the trading of the capital-intensive goods. This developing concern is supported by the
Hecksher-Ohlin model. This theory suggests that country intends to enhance its trade volume
through emphasizing on its abundant resources. In this way, the economy will be able to equate
the international price with the domestic price.

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Reference
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