Page 185 - The Principle of Economics

CHAPTER 9 APPLICATION: INTERNATIONAL TRADE 187
IN THE NEWS
Life in Isoland
OUR STORY ABOUT THE STEEL INDUSTRY and the debate over trade policy in Isoland is just a parable. Or is it?
Clinton Warns U.S. Will Fight Cheap Imports
BY DAVID E. SANGER
President Clinton said for the first time today that the United States would not tolerate the “flooding of our markets” with low-cost goods from Asia and Rus- sia, particularly steel, that are threaten-
ing the jobs of American workers.
The President’s statement came days after a White House meeting of top executives of steel companies and the United Steelworkers of America, which helped get out the vote for Democrats last week, playing a pivotal role with other unions in the party’s success in
midterm elections.
After the meeting, which included Mr. Clinton, Vice President Al Gore, and top Cabinet officials, aides said the White House would not grant the unions’ demand to cut off imports of steel they say are being dumped in the American markets. But today, the President warned that foreign nations must “play by the rules,” appearing to signal that the United States would press other na- tions to restrict their exports to the United States. [Author’s note: In the end, the Clinton administration did de- cide to limit steel imports.]
SOURCE: The New York Times, November 11, 1998, p A1.
steel, a tax on steel imports is irrelevant. The tariff matters only if Isoland becomes a steel importer. Concentrating their attention on this case, the economists com- pare welfare with and without the tariff.
Figure 9-6 shows the Isolandian market for steel. Under free trade, the domes- tic price equals the world price. A tariff raises the price of imported steel above the world price by the amount of the tariff. Domestic suppliers of steel, who compete with suppliers of imported steel, can now sell their steel for the world price plus the amount of the tariff. Thus, the price of steel—both imported and domestic— rises by the amount of the tariff and is, therefore, closer to the price that would prevail without trade.
The change in price affects the behavior of domestic buyers and sellers. Be- cause the tariff raises the price of steel, it reduces the domestic quantity demanded
DD SS
from Q1 to Q2 and raises the domestic quantity supplied from Q 1 to Q 2 . Thus, the
tariff reduces the quantity of imports and moves the domestic market closer to its equilib- rium without trade.
Now consider the gains and losses from the tariff. Because the tariff raises the domestic price, domestic sellers are better off, and domestic buyers are worse off. In addition, the government raises revenue. To measure these gains and losses, we look at the changes in consumer surplus, producer surplus, and government rev- enue. These changes are summarized in Table 9-3.
Before the tariff, the domestic price equals the world price. Consumer surplus, the area between the demand curve and the world price, is area A 􏰀 B 􏰀 C 􏰀 D 􏰀 E 􏰀 F. Producer surplus, the area between the supply curve and the world price, is area G. Government revenue equals zero. Total surplus, the sum of consumer surplus, producer surplus, and government revenue, is area A 􏰀 B 􏰀 C 􏰀 D 􏰀 E 􏰀 F 􏰀 G.