This article discusses how the USA imposes a tariff on Chinese goods. Solar panels. This has led to Beijing retaliating against U.S. tariffs by imposing duties on imports of U.S. polysilicon, the raw material used to make wafers for solar cells. A tariff is defined as a tax on imported goods, and duties are also imposed taxes. The effects of a tariff can be shown by the following diagram:
Diagram Showing the Effect of a Tariff.
(Diagram from: "Protectionism - Barriers to International Trade.")
The tariff increases the price of imports from Wp to Wp+tariff. As import increases quantity supplied increases domestically from Qs to Qs1 while quantity demanded decreases domestically from Qd to Qd1. As a result imports have shrunk from Qd-Qs to Qd1-Qs1. From the graph we get that a tariff increases the price of imports and so the imports have fallen. The second thing we learn is that domestic production has increased. The third part we learn is that prices have increased from Wp to Wp+tariff. This tariff also produces government revenue which is equal to the area shaded in.
The imposition of a tariff has a number of advantages. A tariff reduces a current account deficit. A current account deficit occurs when the value of imports is greater than the value of exports. By imposing a tariff and reducing the volume of imports the current account deficit will decrease. This seems positive for the USA who has been in an increasingly high current account deficit since 2008. Another benefit is that a tariff will lead to an increase in aggregate demand. As imports decrease aggregate demand increases. The reason for this is that aggregate demand is equal to consumption + investment + government spending + (exports – imports). Therefore if imports decrease aggregate demand will increase leading to the shift of the aggregate demand curve to the right and an increase in output. This will be beneficial to the US economy as it will lead to more exchange within the US...
Please join StudyMode to read the full document