Analyzing the Impact of US Steel Tariffs on Trade and Welfare Effects

This assignment explores the impact of US steel tariffs on both domestic and international trade, focusing on the welfare effects in the US and Canada, and on the global stage. It examines how tariffs imposed by the US on steel imports affect consumer and producer surplus, government revenues, and overall national welfare. The analysis includes a discussion on the potential for increased domestic prices and reduced consumer well-being in the US, as well as the effects on Canadian producers and consumers due to decreased exports. Furthermore, the assignment evaluates the effectiveness of tariffs in limiting aggregate imports of steel, referencing historical data and trade agreements. The assignment concludes that while tariffs may offer some benefits to domestic producers and government revenues in the US, they can negatively impact global welfare and disrupt established trade relationships. Desklib provides access to similar assignments and study resources for students.

Question 1.
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)
US Canada
D
S
A
E
B
F
C
G
D
H
a
e
b
f
c
g
d
h
s D
PIM
PFTT
PEX
PIM
PFTT
PEX
SIM DIM DEX SEX

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
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.
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-
1,000,000,000
2,000,000,000
3,000,000,000
4,000,000,000
5,000,000,000
6,000,000,000
7,000,000,000
Canada
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.

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
Israel
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.
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-
500,000,000
1,000,000,000
1,500,000,000
2,000,000,000
2,500,000,000
3,000,000,000
3,500,000,000
Mexico

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).

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-
5,000,000,000
10,000,000,000
15,000,000,000
20,000,000,000
25,000,000,000
30,000,000,000
35,000,000,000
40,000,000,000
45,000,000,000
World
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.