US Tariff and how it impacts domestic steel price (1 Viewer)

[_Anonymous]

My teacher was telling us about how due to the tariff the US put on steel and aluminium imports, the price of both of them would increase (which makes sense). But he then said that domestic suppliers would also increase supply AND increase the price, meaning the overall price of steel and aluminium would increase even for domestic consumers in the US; which brings to the discussion of how this tariff proposal could possibly cost companies more to purchase steel and aluminium (even from domestic purchases).

Can someone explain why the steel industry in the US would also increase the price of steel where it matches the imports? Wouldn't it be stupid to do so (wouldn't it make consumers just purchase imported items regardless due to no price difference)? I don't understand why the price of domestic steel in the US would also rise with the increase in tariffs on imported goods.

Our teacher said that we don't need to worry about this too much, since we're in Year 11 and Tariffs are a HSC topic; but we learnt about the supply and demand curve and he demonstrated the model to us with this example, but it doesn't make sense for this scenario.

 

[sida1049]

The supply and demand model assumes competitiveness. Once tariffs are applied, the market becomes less competitive.

Think about it from the perspective of the domestic producers: if your international competition becomes less price competitive (i.e. the price of imported minerals increase), then you would maximise profit by raising your price from the competitive price (i.e. the price that prevails under perfect competition) to just under the price of imports. Therefore, the price for domestic consumers will be higher under the newly imposed tariffs.

 

[_Anonymous]

The supply and demand model assumes competitiveness. Once tariffs are applied, the market becomes less competitive.

Think about it from the perspective of the domestic producers: if your international competition becomes less price competitive (i.e. the price of imported minerals increase), then you would maximise profit by raising your price from the competitive price (i.e. the price that prevails under perfect competition) to just under the price of imports. Therefore, the price for domestic consumers will be higher under the newly imposed tariffs.

So if the domestic supplier increases the price of the good, would they also increase supply since they’re earning more money and can afford to hire other workers?

Also the fact that there is a decrease in supply of imported items, so domestic steel companies replace that deficit in imported goods by supplying more of their own steel at a higher price?

 

[sida1049]

So if the domestic supplier increases the price of the good, would they also increase supply since they’re earning more money and can afford to hire other workers?

They could expand, hire more workers and increase output. It doesn't necessarily mean they will; there's an argument to be made that they might just pocket the profit instead.

What you should mention depends on the case you're arguing for: if your thesis is that tariffs are good, then argue that domestic industries may expand from a tariff on imported goods. If your thesis is that tariffs are bad, then argue that tariffs foster the uncompetitiveness of inefficient domestic industries and that extra profits does not necessarily entail increases in productivity.

Also the fact that there is a decrease in supply of imported items, so domestic steel companies replace that deficit in imported goods by supplying more of their own steel at a higher price?

Yep, they certainly could.

 

[elkedag]

Something not covered in the HSC, but might be of interest.
The USA is a large open economy, it has a large impact on the world price of steel. As the world price falls to 'absorb' some of the impact of the tax (recall that tax incidence is distributed between buyers and sellers), this means that imports of steel are actually cheaper for the USA. Hence there is a terms of traded improvement for the USA. This does not happen for small economies like Australia because Australia lacks 'market power' so takes the world price as given. (i.e. in the HSC, they teach that the world price is an exogenous horizontal line - which is true for small economies). For large economies, if the tariff is set appropriately, this benefit from the improved terms of trade can outweigh the deadweight loss.
Domestic prices after the tariff are higher assuming an upward sloping export curve because consumers bear part of the incidence of the tax. Domestic producers can charge a higher price due to its increased market power.

For further reading: http://internationalecon.com/Trade/Tch90/T90-8.php