Stick with Steel Tariffs

2. Use a supply and demand diagram to show the effects of the US tariff on imported steel.

The tariff has the effect of shifting the world supply curve vertically. This will create a redistribution of surplus within the graph. We see that consumer surplus will decrease which is a net loss. Furthermore this makes consumers unambiguously worse off than under a free trade regime, but still better of than under a system without trade. The producer surplus has increased, as they are now receiving an extra amount per sale and with this increase in the price level, domestic production has increased from Q1 to Q3, while the level of imports has been reduced to Y4 – Y3.

3. Using a diagram explain one other type of protectionist policy that the American government might have considered in order to support the steel industry.

The effect of an import quota on domestic producers is to allow them to recover the producer surplus in area b, which they take away from consumers. The effect on international producers is that they now obtain area f as a surplus the effect on consumers is that they lose b, c, f and g. the effect on the total world economy is that areas c and g are lost in what is called a deadweight loss. C represents the consumer surplus which is lost by goods consumed but not at a surplus to producers. G represents the consumer surplus which is lost as these goods are not consumed at all. The effect on the domestic economy is that b is gained but c, f and g are lost.

4. Using your knowledge of economics and the information in the article, evaluate the arguments for and against the protectionism in the steel industry.

Americas steel industry was going through a crisis and the domestic suppliers were unable to complete sales since the importers could offer far lower prices with the same class products. In this case the protectionist policies saved the domestic industry creating opportunities for infant industries, competing in such a large market where such low priced products are supplied, and acting as a savior to a declining industry. If the government wouldn’t have intervened, this economy would have caused further structural unemployment and this would have caused more concern for the government. This intervention not only benefited the market but also genuinely benefited local authorities. Governments receive more income from domestic suppliers than from importers and therefore the government would genuinely want to maintain the domestic supply at a high rate so that importers don’t take over the market. Governments never want to depend on foreign intervention as this in consequence could trouble the country. Consequently this concludes to the fact that when a country is too dependant on foreign involvement, if this involvement is extracted and the multinationals leave the country, the country will fail economically.