Question

Canada's forestry industry (composed mainly of those involved in the lumber industry) directly employs about 370,000 workers and indirectly employs an additional 510,000 people in support services. Forestry products account for nearly 3 percent of Canada's gross domestic product (GDP) and \(14.1\) percent of its exports. Lobbyists for the U.S. lumber and timber producers recently filed a complaint with the U.S. International Trade Commission (ITC) and the U.S. Department of Commerce (DOC) alleging that the Canadian government provided a subsidy to its lumber producers and caused harm to U.S. lumber and timber producers. As a result of these concerns, one U.S. lobbyist proposed the imposition of a 15 percent excise tariff on all Canadian forestry products. Determine the likely impact of the proposed 15 percent excise tariff on the equilibrium price and quantity of lumber exchanged in the United States. Would domestic consumers and producers benefit from the proposed tariff? Explain carefully.

Short answer

Domestic consumers would be made worst off because their surplus would decrease, and domestic producers would be better off because their surplus would increase. Additionally, imposed tariffs would benefit the government because all of the revenue earned through tariffs would go into the state budget.

Step-by-step solution

Economic welfare

The economic welfare implies people’s well being after an economic decision is made for the country. Taxation on external trading sometimes hurts domestic consumers, but improves domestic producers and the government body. Thus, import or quotas affect economic welfare.

Explanation the domestic consumers and benefit from the proposed tariff

Every tool designed to impose restrictions on the imports of goods (either through tariffs or quotas) leads to a decline in the supply of these goods.

Lower supply means a shortage in the market, leading to an increase in prices and a decrease in supplied quantity.

Following this conclusion, we can easily see that the proposed 15% excise tariff would lead to a higher equilibrium price and a lower equilibrium quantity of lumber.

Thus, domestic consumers would be made worst off as their surplus would decrease. The domestic producers would be better off as their surplus would increase.

Finally, the imposed tariffs would benefit the government because all of the revenue earned through tariffs would go into the state budget.