a b
c d e f
Pu
h
g i j k
Q1 Q3 Qe Q4 Q2 Quantity of agricultural products (tons)
As we can see on figure 1 a taxed place on around 90 American goods by the Mexican government, the tax shifts the supply curve upwards by the amount of the tax. In this case it shifts the U.S supply curve upwards, since it is placed on the American producers of the goods and not the domestic producers. Before the tariff, Q2 goods were being consumed at the price of Pu. The domestic production was Q1, and the imports were Q1Q2. As the tariff was imposed, it shifted the supply curve upwards so the market price rises from Pu to Pu+t. The demanded quantity falls from Q2 to Q4, because the price has risen. The domestic production increases from Q1 to Q3 therefore revenue increases. The American producers supply the rest which is now Q3-Q4. They now receive higher price, but smaller quantity, their revenue falls. The government now receives tariff revenue.
The main American problem with this tariff is that at the time of economic recession to impose tariff does not help in the American recovering. During the recession the countries tries to shift the aggregate demand to the right. The existing recession is a special one in the history of the recessions. It is a worldwide one and it involves credit crunch at the same time.
Now I am going explain why the Americans are so against this tariff, and why the Mexican government imposed it.
Figure 2: the governments needs shift the aggregate demand
Price
AS
AD2
AD1
GDP
The aggregate demand is built up by the consumption, investment, government spending, net export. To recover from the recession, the government needs to shift the demand curve the right. One way to do this shift is that increase the net export, but the Mexican tariff limits and decreases the export could be delivered to Mexico. This tariff does not help with the American economic recovery and decreasing export rate and smaller revenue of the business could lead to firing people from this employment sector, what makes the recovery much harder. The other American concern was that the tariff is against the NAFTA agreement. The NAFTA is a free trade area between US, Canada and Mexico. All trade in the NAFTA region suppose to be tariff-free. Since Mexico joined the free trade area Mexico’s share of the US import market has grown with 7%.
On the other hand we need also investigate the Mexican opinions. As I mentioned this current economic slowdown is worldwide, and hits every single country really seriously. The Mexican government tries to protect its own industries from the cheaper American goods. Without the tariff the import rate of the goods would be higher what makes the domestic production less, it could lead to unemployment in the industries and less revenue to domestic producers, the tariff makes domestic more competitive and they receive more revenue at the price with the tariff. Furthermore the government could receive significant amount of money from the imposed tariff and with the tariff the import rate decreases what makes the balance of payments better.
The further outcomes of the tariff could be: after the tariff Q1Q3 are now produced by relatively inefficient producers, as opposed to more efficient foreign producers. The foreign producers would produce this quantity for a minimum revenue h while domestic producers need a minimum revenue h+c. Thus c represents the inefficiency of the domestic producers there it a deadweight loss.
Finally it is a controversial situation, to protect the industries and own employment or support world economic recovery.
Word count: 741
A tariff is a tax that is charged on imported goods.
