4.2 (Global Econ) Trade protection: Trump tariffs: Expenditure switching; 4.5 Appreciation USD; Pt 1

Video tutorial illustrating how to draw, analyze, evaluate the potential consequences of Trump tariffs on expenditure switching & value of the US & Canadian dollar in the FOREX
Bank of Canada: "Tariffs and the Exchange Rate: Evidence from Twitter":
www.bankofcana...
Note:
IB Econ Paper analysis (At time 3:27)
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Analysis
Graph A: U.S. national economy with applied per unit import tariffs
x-axis measures quantity
y-axis measures the price
Sd1 (law of supply) = domestic supply
Dd1 (law of demand) = domestic demand
Sd1=Dd1, provides an equilibrium domestic price & quantity (Qs=Qd)
The U.S. engages in free trade, North American Free Trade Agreement (NAFTA) with Mexico, Canada, accepts the world price (Pw)
Pw is less than the equilibrium domestic price, thus U.S. firms will reduce Qs to Q1 (point A) (some productively inefficient firms will shut down & exit their industries since they do not have the comparative advantage due to higher production costs, this will also lead to increased unemployment in these industries)
Pw is less than the equilibrium domestic price, thus U.S. consumers will increase Qd to Q4 (point C)
At Q4, MB = MC, global allocative efficiency
Qd is greater than Qs, thus the U.S. will import (from Canada, Mexico, other nations) by quantity of Q4 - Q1
The Trump administration decides to impose a per unit tariff to protect U.S. domestic industries from foreign competition
Trade protection may also achieve expenditure switching, which is the goal of switching domestic consumption away from imported goods & towards domestically produced goods, which can reduce a current account deficit (trade deficit)
Per unit tariff applied, thus price rises to Pw + tariff; world supply curve shifts upward by the amount of the tariff
Domestic Qd decreases as a result of the increased price to Q3 (point D)
Domestic Qs increases as a result of the increased price to Q2 (point B)
At Pw + tariff, Qd at Q3 is greater than Qs at Q2, thus the U.S. imports a reduced quantity of Q3 - Q2
Note:
IB Econ Paper evaluation for the economic model (At time 9:00)
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Evaluation
The following provides an evaluation of the per unit tariff's impact on stakeholders
1. Consumers are worse off as their consumer surplus is reduced as a result of an increase in price from Pw to Pw + tariff
Consumer surplus before the tariff is areas a + b + c + d + e + f
Consumer surplus after the tariff is areas a + b
(a + b + c + d + e + f) is greater than (a + b)
Reduced consumer surplus will thus lead to reduced spending in other industries in the U.S. economy leading to reduced total revenue and profit for those firms, as well as increased unemployment in those industries
2. Producers are better off as their producer surplus and total revenue is increased as a result of the increase in price from Pw to Pw + tariff
Producer surplus before the tariff is area g
Producer surplus after the tariff is areas g + c
(g + c) is greater than g
TR1 (before tariff) = Pw x Q1
TR2 = (Pw + tariff) x Q2
TR2 is greater than TR1
3. Workers in protected industries are better off since there is increased Qs by domestic producers from Q1 to Q2 leading to increased employment of factors of production such as labor
4. The government both gains and loses with the applied tariff
The government gains political support from domestic firms and workers within the protected industries
The government loses political support from domestic consumers that face higher prices (imported inflation; cost-push inflation)
The government gains tariff revenue represented by area e
The U.S. government will have created political tension with the government's of exporting nations (Canada and Mexico) that have been negatively impacted by the tariff (reduced exports by the firms in those exporting nations: Canada and Mexico)
5. Foreign firms are negatively impacted by the tariff
Reduced imports in the U.S. results in reduced exports for foreign nations (Canada and Mexico) with productively efficient producers, this will also lead to rising unemployment in the industries of those foreign nations
6. Global allocative efficiency is negatively impacted as at Q3, MB is greater than MC, which generates and underallocation of resources to the production and consumption of goods in the global economy (welfare loss of area f)
Welfare loss of area d = increased output by productively inefficient U.S. firms
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Graph B: Market, USD (At time 11:40)
y-axis: CAD per USD
x-axis: Quantity of USD
Reduced U.S. imports of Canadian goods leads to reduced supply of USD in the FOREX
S1 to S2
Appreciation of US dollar (E1 to E2)
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Graph B: Market, CAD (At time 14:30)
y-axis: USD per CAD
x-axis: Quantity of CAD
Reduced U.S. imports of Canadian gods will lead to reduced demand for CAD in the FOREX
D3 to D4
Depreciation of CAD (E3 to E4)

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