Question

Use the following information to work.Suppose that in response to huge job losses in the U.S. textile industry, Congress imposes a 100 percent tariff on imports of textiles from China. Explain how the tariff on textiles will change the price that U.S. buyers pay for textiles, the quantity of textiles imported, and the quantity of textiles produced in the United States.

Short answer

The tariff doubles the price of imported textiles, reduces imports, and increases domestic production.

Step-by-step solution

Understand the Impact of the Tariff

A 100 percent tariff means that the price of imported textiles will double. If the original price of a textile item from China is P, the new price with the tariff will be 2P.

Effect on Prices for U.S. Buyers

The doubling of the price due to the tariff means U.S. buyers will now pay more for textiles. Specifically, buyers will pay 2P for imported textiles instead of P.

Change in Quantity of Textiles Imported

Higher prices typically result in lower quantities demanded. Therefore, the quantity of textiles imported from China will decrease because the higher cost will push U.S. buyers to either buy less or seek alternatives.

Change in Quantity of Textiles Produced in the U.S.

As the price of imported textiles doubles, U.S. producers may find it more profitable to produce textiles domestically. Therefore, U.S. textile production is likely to increase to meet some of the demand previously met by lower-cost imports.

Summary of Impacts

Summarizing the changes: the tariff increases the price of imported textiles, decreases the quantity of imports, and increases domestic textile production.

Key concepts

Tariff Effects

Tariffs are taxes imposed on imported goods and services. In this case, Congress has imposed a 100 percent tariff on textiles imported from China. This means every dollar's worth of textile from China now costs two dollars. The primary effect of this tariff is to increase the cost of imported textiles. This makes imports more expensive and less competitive compared to domestically produced goods. The intention behind such tariffs is often to protect domestic industries from foreign competition by making imports less attractive. However, higher costs for imports can also lead to higher prices for consumers, who pay more for goods affected by the tariff.

Import Prices

The immediate consequence of a tariff is an increase in the price of imported goods. For example, if an imported textile previously cost \(10, a 100 percent tariff would raise its price to \)20. This doubling in price affects consumers directly, making imported textiles less affordable. Higher import prices can reduce the competition that domestic companies face, as consumers might shift their purchases to locally produced alternatives. This shift can protect and even boost domestic industries, but it can also lead to higher prices for consumers, as they are left with fewer lower-cost options.

Domestic Production

One of the main goals of imposing tariffs is to encourage domestic production. By making imported textiles more expensive, U.S. producers can better compete in the market. This may lead to an increase in domestic textile production because local companies can now sell their products at higher prices, making production more profitable. Moreover, increased domestic production can lead to job creation in the textile industry. However, while it benefits local producers and workers, the higher costs may still be passed onto consumers. Additionally, industries that rely on textile imports may face higher production costs, potentially leading to higher prices for their finished products.

Quantity Demanded

Higher prices typically lead to a decrease in the quantity demanded for goods. When the price of imported textiles doubles due to the tariff, consumers are likely to buy fewer imported textiles. They may either cut back on their total textile purchases or switch to more affordable domestic textile products. The decrease in import demand can be substantial, depending on the price elasticity of demand for textiles. Elasticity measures how much the quantity demanded responds to price changes. If textiles have a high elasticity, the decrease in imported quantity will be more significant. This reduction in demand for imports can redirect consumer spending towards domestically produced textiles, boosting the local industry.