Introduction
The modern multidimensional global economy
The modern multidimensional global economy has been affected by political economies of trade policies in international trade. In 2018, the U.S. government imposed trade tariffs commonly referred to as ‘Trump Tariffs’ to alleviate the trade deficit by shifting the country’s economic policy from being multilateral free trade agreements to bilateral trade deals. Trade restrictions and tariffs have been imposed on products such as residential washing machines, solar panel, steel and aluminium to the European Union, Canada and Mexico. The U.S. government has also imposed tariffs on Chinese imports, with China being one of its largest trade partners; this has led to a trade war between the two countries. Countries have retaliated to the trade restrictions by imposing corresponding tariffs to U.S. products. Trade restrictions and tariffs imposed by the U.S. have been consequential to the U.S., European Union and countries affected by the tariffs.
Implications of Trade Restrictions and Tariffs on the U.S.
Political economy in trade policies is the rationale behind protection policies even though when economists fully advocate for free trade. (Tax Foundation, 2018) provides an analysis of tariffs imposed on U.S. imports estimated to increase tax revenue of $80 billion. Tariffs imposed by Trump administration include 25 and ten per cent tariffs on imported steel and aluminium respectively from Canada and Mexico, 25 per cent tariff on approximately $250 billion imports from China and washing machine, solar cell and module import tariffs. Additionally, the U.S. government acquired authorization from the World Trade Organization to impose 10 and 25 per cent tariffs on aircraft and agricultural products against the European Union.
(Section 232) Tariffs on Steel and Aluminum
Under the Trade Expansion Act, ten and twenty-five per cent import tariffs were imposed on steel and aluminium products such as plated steel, slabs, coils and rolls of aluminium. The U.S. is currently not sufficient in steel and aluminium and imports over 30 per cent of both metals. According to QBE (2018), soon after the tariffs were announced the price level of steel escalated by 50 per cent above European prices and 80 per cent above Chinese prices. The main reason behind the import tariffs was to protect local manufacturing industries. However, the economies of scale in the local production of steel and aluminium will be experienced in the long term. In 2019, the government lifted tariffs on steel and aluminium, leading to a reduction in tax revenue by approximately $2.6 billion (TAX FOUNDATION, 2020). According to the Trade Partnership data, higher steel and aluminium prices also could ripple across the economy, in higher costs for commercial construction, the building of roads and bridges, as well as for a wide variety of consumer product Tariffs are expected to increase the production cost of steel-related products weakening the competitiveness of American manufacturers. This created a monopolistic competition, potentially leading to job losses. Increased production cost due to tariffs is eventually reflected on consumer prices, causing inflationary pressures to the economy.
(Section 303) Tariffs on Chinese Products
The Gravity model of international trade holds that the amount of trade between the two economies depends on the distance and size of economies. Tariffs on Chinese imports have led to a trade war causing reductions in company profit margins in both nations. Currently, the U.S. government imposes a 25 per cent tariff on approximately $250 billion of Chinese imports and 7.5 per cent on approximately $112 billion worth of imports (TAX FOUNDATION, 2020). The general effect has been on consumer prices and financial difficulties for the farmer. American companies have been forced to diversify outside China and look for alternatives. However, this is easier said than done with Companies such as Apple, Boeing and General Motors heavily invested in China. This is per Ricardian’s model of trade that advocating for imports of labour-intensive products from countries having a higher comparative advantage in producing labour-intensive products.
The Chinese government responded by imposing tariffs on U.S. exports that affected the agricultural sector. China imports soybeans from the U.S. in large quantities, and as a result, in July 2018, China raised the import tariff from 3 per cent to 25 per cent. Soybeans export to China decreased by approximately $9.2 billion from $12.2 billion in 2017. The tariff resulted in an increase in bushel inventories to 3.74 billion, thus leading to a decrease in soybeans prices.
U.S. and China World Trade Accession Agreement on pork in 2004 placed a 12 per cent tariff on U.S. pork exports to China. According to USDA Global Agriculture Information reports, China increased the pork tariff imports by 25 per cent in April 2018 and later an additional 25 per cent resulting in a 62 percent tariff. U.S. pork export sales slowed down in 2018, leading to increased hog inventory amounting to 74.6 million head, largest inventory since 1943. In Jul 2018, China imposed additional tariffs on various U.S. agricultural products such as apples, cherries, oranges, plums and other types of fresh fruits. USDA statistics reveal that the value of fresh exports fell from $231 million in 2016 to $124 million, apple exports declined from $20.7 million to $13 million while cherries decreased from $122 million in 2017 to $76 million in the year closing 2019. Following the tariffs, the producer price index of apples and fresh fruits declined 10.1 percent in August, while cherries, oranges and other types of fresh fruits decreased by 25.4 percent in August.
World Trade Organization Dispute against the European Union
U.S. won the WTO trade dispute against the European Union in 2019. The dispute over whether Europe’s Airbus and America’s Boeing have been getting illegal state aid. The ruling authorized America to impose import tariffs of up to 100 percent on $7.5 billion worth of European goods. In reference to the ruling, 15 percent tariffs were imposed on Boeing aeroplanes and 25 percent on agricultural and a sweep of products such as suitcases, tractors, and frozen shellfish, gin and video game consoles. The WTO made a similar ruling in October in favour of the EU over the support offered to Boeing. The EU announced that it would apply border taxes of 25% to alist of other from American items, which includes tractors, tobacco ketchup, orange juice, cheddar cheese and sweet potatoes.
(Section 201) Solar Panels and Washing Machines.
In 2018, 20 percent tariff was imposed on a washing machine which was a boon to Whirlpool Corp. The company had repeatedly petitioned the government from losing market share to computers, LG and Samsung. The U.S. solar industry is larger than manufacturing and overall expected. The price of solar panels has dropped dramatically over the years as technology advanced, and imports ballooned. In June the average price was $3.03 per watt, down 20 percent since 2015 The Solar Energy Industries Association has predicted that solar tariff has already cost 8,000 construction jobs in projects and they could reach 23,000.
Ricardian and Hechschern-Ohlin Model on U.S. Tariffs
The Hechschern-Ohlin and Ricardian models on international trade, predict that countries will export products to industries in abundant endowment with production factors. The theory provides that a country will specialize in its production and export on a good the country’s factors of production are relatively higher and will import goods which are intensive to the factors of production due to scarcity of resources. The U.S. is one of the largest importers of steel and aluminium from Mexico, Canada, India and China. China and India and other exporters are more labour intensive in production of steel and aluminium. The imposition of tariffs reduces the level of production of steel and aluminium related products. The tariff will force the American steel industry to increase production by intensifying the labour workforce to meet the country’s demand for steel and aluminium.
Implications of Trade Restrictions and Tariffs on Trade Partners.
The European Union and countries affected by the tariffs affected retaliated by imposing tariffs on U.S. exports. U.S. Economy has been negatively impacted after imposing the tariffs even though it has gained tax revenue, in terms of prices, excess inventory of products mainly agricultural and trade relations with countries and regional blocks. The trade partners affected by tariffs are forced to diversify their exports outside the U.S. Trade partners harmed by trade restrictions include China, India, Canada, Mexico and the European Union.
Impact of tariffs on China
Trade restrictions and tariffs imposed affected $250 billion Chinese products. China had to diversify its market and look for its ma China retaliated to section 301 tariffs by imposing approximately $113 billion worth of American products. Products affected by the tariff include soybeans and pork, forcing the country to look for alternative sources, for instance, in 2018 China had to import pork from Africa due to the seventy-two percent tariff on pork imports. According to FEDS Notes (2019), the direct long term impact of the implemented tariffs has reduced the GDP by 0.25 percent when compared to the GDP in 2018. The tariff effects in 2019 have led to 0.39 percent reduction, which is not a large effect in bilateral trade with America.
Impact of Trump Tariffs in India
On March 23, 2018, India was part of the first round of countries hit by Trump’s national security tariffs. Trump imposed tariffs of 25 percent on $761 million of steel and 10 percent on $382 million of aluminium imported from India. Combined, these tariffs covered roughly 2.3 percent of India’s exports to the United States in 2017. India’s exports of steel products have fallen by 46 percent in the 12 months since the tariffs were imposed. Trump ultimately pushed India into retaliating in June 2019 with his decision to raise tariffs by removing it from the GSP program. . GSP withdrawal also means that India’s exemption from Trump’s 2018 tariffs on solar panels and washing machines—imposed under Section 201 of the Trade Act of 1974—no longer applies.
Trump’s GSP-related tariff hike affects $5.8 billion of India’s exports or more than 12 percent of exports to the United States in 2017. Combined, Trump’s national security actions on steel and aluminium as well as the withdrawal of GSP (and a new application of duties under Section 201) increased US tariffs on 14 percent of India’s exports to the United States, or roughly $7 billion of trade, in 2017.
Impact of Tariffs in Canada
The U.S. 10 percent tariff on unwrought and unalloyed aluminum from Canada will hurt producers but will not be very consequential to the consumer. Rather, the $3.6 billion burden in retaliation tariffs that the country is planning to impose on American imports. This will make certain products in Canada expensive for Canadians.
Impact of Tariffs in the European Union
The overall net effect of the US tariffs on the 28 European Union countries has been negative in two different ways which are direct and indirect. The direct effect on the countries is negative for steel and aluminium producers and the jobs secured by the industry since their exports to the US are expected to decrease. The position of EU aluminium and steel producers could further deteriorate because the US has already introduced tariffs for these goods to other countries such as China and producers from these countries are already trying to redirect their exports from the US to the EU.
Tariff Implications and Economies of Scale.
Economies of scale are the cost-effective benefits achieved when a company becomes efficient in its production process. This model explains the need for trade among countries like the U.S., China, and the European Union. The countries have similar technologies, similar endowments in factors of production but still engage in voluminous trade due to economies of trade. The tariff imposed by the U.S. affects external economies of scale and is beneficial to domestic industries as it eliminates or reduces competition for local companies. On the other hand, foreign industries are forced to decrease their production or explore other external economies advantages to offset production in affected industries. The U.S. tariffs on steel, aluminium, solar and water panels are intended to capitalize on external economies of scale by supporting local production. However, to achieve that the country has faced economic challenges such as job losses and inflationary pressures due to increased price levels on consumer products.
Conclusion
The trade restrictions and tariffs imposed by the U.S. in pursuit of a bilateral trade system have affected the nation and its trade partners. Tariffs on aluminium and steel escalated the price levels on local production and steel-related consumer products. Trade partners such as India, Canada and China had to incur the effects of bulk inventories and retaliation tariffs. Agricultural products such as fresh fruits, soybeans and pork have been on the receiving end of these tariffs. Agricultural prices have fluctuated and stores holding large inventories when the tariffs were implemented. However, it is good to note the protection policies have negative economic effects on the country imposing the trade restrictions for a short term but once economies of scale are achieved positive economic effects are achieved in the long term.
References
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