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”:

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)…(read more)

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Trade protection has been a controversial topic in the global economy for many years, with some countries imposing tariffs and other barriers to protect their domestic industries from foreign competition. Most recently, the Trump administration in the United States has been at the center of this debate, as President Trump has implemented numerous tariffs on imports from various countries.

One of the primary justifications for trade protection measures like tariffs is the concept of expenditure switching. This idea suggests that by imposing tariffs on foreign goods, domestic consumers will be more likely to purchase goods produced within their own country. This is intended to boost domestic industries and create jobs, ultimately stimulating the economy.

President Trump’s tariffs on imports of steel and aluminum, for example, were implemented in an effort to protect American steel and aluminum producers from what he viewed as unfair competition from countries like China. However, the consequences of these tariffs have been a source of much debate, with critics arguing that they can lead to higher prices for consumers and potentially even a trade war between countries.

In addition to trade protection measures, another factor influencing global trade is the appreciation of the US dollar. A strong dollar can make US exports more expensive for foreign buyers, leading to a decrease in demand for American products abroad. Conversely, a strong dollar can make imports cheaper for American consumers, potentially leading to an increase in imports and a trade deficit.

The appreciation of the US dollar can also have broader implications for the global economy, as it can impact the competitiveness of other countries’ exports and lead to changes in exchange rates. For example, a strong US dollar can put pressure on emerging market economies that have borrowed in US dollars, as their debt becomes more expensive to repay.

Overall, trade protection measures like tariffs and the appreciation of the US dollar are important factors influencing the global economy. While these measures can have short-term benefits for certain industries or countries, they can also have negative consequences and lead to broader economic challenges. As countries continue to navigate these complex issues, it will be crucial to strike a balance between protecting domestic industries and promoting international trade and cooperation.