Question III Suppose that the U.S. govt. is under heavy pressure from the domestic Steel industry to restrict the import of Steel from China. The protectionists demand that the price of a $250 per ton of Steel must be raised to $300 if their incomes are to be safe. The U.S. govt. has three choices: 1) free trade with no protection; 2) a special 20% tariff on Steel backed by vague claims that imports from China threaten national security; 3) forcing China to agree to a voluntary export restraints (VER). The three choices would lead to these prices and annual quantities. Free trade 20% tariff VER Domestic US price per $250 $300 $300 ton World price per ton $250 $250 $250 Domestic production 80 90 90 of Steel (millions of tons) Domestic Consumption 130 110 110 of Steel (millions of tons) Note that the world price did not change as a result of the tariff or VER. Therefore, the US is a small country in this example. a) What is the volume of imports in the case of free trade, tariffs, and VER? b) Draw a picture to show the impact of the alternative trade restrictions. c) Calculate the U.S. welfare gains or losses from the tariff, and the U.S. welfare gains or losses from the VER, relative to free trade. Which of the three choices looks best for the U.S. as a whole? Which looks worst?
Question III Suppose that the U.S. govt. is under heavy pressure from the domestic Steel industry to restrict the import of Steel from China. The protectionists demand that the price of a $250 per ton of Steel must be raised to $300 if their incomes are to be safe. The U.S. govt. has three choices: 1) free trade with no protection; 2) a special 20% tariff on Steel backed by vague claims that imports from China threaten national security; 3) forcing China to agree to a voluntary export restraints (VER). The three choices would lead to these prices and annual quantities. Free trade 20% tariff VER Domestic US price per $250 $300 $300 ton World price per ton $250 $250 $250 Domestic production 80 90 90 of Steel (millions of tons) Domestic Consumption 130 110 110 of Steel (millions of tons) Note that the world price did not change as a result of the tariff or VER. Therefore, the US is a small country in this example. a) What is the volume of imports in the case of free trade, tariffs, and VER? b) Draw a picture to show the impact of the alternative trade restrictions. c) Calculate the U.S. welfare gains or losses from the tariff, and the U.S. welfare gains or losses from the VER, relative to free trade. Which of the three choices looks best for the U.S. as a whole? Which looks worst?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Question III
Suppose that the U.S. govt. is under heavy pressure from the domestic Steel industry to
restrict the import of Steel from China. The protectionists demand that the price of a $250 per ton of Steel must
be raised to $300 if their incomes are to be safe. The U.S. govt. has three choices: 1) free trade with no
protection; 2) a special 20% tariff on Steel backed by vague claims that imports from China threaten national
security; 3) forcing China to agree to a voluntary export restraints (VER). The three choices would lead to these
prices and annual quantities.
Free trade
20% tariff
VER
Domestic US price per
$250
$300
$300
ton
World price per ton
$250
$250
$250
Domestic production
80
90
90
of Steel (millions of
tons)
Domestic Consumption 130
110
110
of Steel (millions of
tons)
Note that the world price did not change as a result of the tariff or VER. Therefore, the US is a small country in
this example.
a)
What is the volume of imports in the case of free trade, tariffs, and VER?
b)
Draw a picture to show the impact of the alternative trade restrictions.
c)
Calculate the U.S. welfare gains or losses from the tariff, and the U.S. welfare gains or
losses from the VER, relative to free trade. Which of the three choices looks best for the U.S. as a
whole? Which looks worst?
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