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 U.S. and Chinese gains from trade will change. Who in the United States will lose and who will gain?

Short answer

The tariff reduces U.S. consumers' gains but benefits U.S. textile producers. China loses due to reduced exports.

Step-by-step solution

Understand the Scenario

The U.S. Congress imposes a 100 percent tariff on textile imports from China. A tariff is a tax on imports, which increases the cost of imported goods, making them more expensive for consumers.

Identify the Effect on U.S. and Chinese Gains from Trade

The tariff will likely decrease imports of textiles from China. Consequently, China will experience a loss in its gains from trade because it will export fewer textiles to the U.S. The U.S. consumers will have to pay higher prices for textiles, reducing their consumer surplus and overall gains from trade. On the other hand, U.S. domestic textile producers will benefit because they won't face as much competition from cheaper imported textiles.

Determine Who in the U.S. Will Lose

Consumers in the United States will lose because they will face higher prices for textiles, reducing their purchasing power and consumer surplus. Industries that rely on cheaper textiles for their production may also face higher costs.

Determine Who in the U.S. Will Gain

On the other hand, U.S. domestic textile producers will gain because the tariff helps them by reducing foreign competition. This could lead to increased sales, revenue, and potentially more jobs in the U.S. textile industry.

Key concepts

consumer surplus

When the U.S. Congress imposes a 100 percent tariff on textiles from China, it significantly impacts consumer surplus. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay for a good. Higher prices for textiles mean U.S. consumers will have less money left over after purchasing textiles, reducing their consumer surplus. The increased cost due to the tariff makes it harder for consumers to buy the same quantity as before. As a result, many might cut back on their purchases, leading to a lower overall standard of living.

domestic industry

Tariffs can have a positive impact on domestic industries. In this scenario, U.S. textile producers benefit from the 100 percent import tax on Chinese textiles. Without the intense competition from cheaper Chinese textiles, U.S. companies can sell more products and potentially increase their market share and revenue.
This may lead to:

• Increased profits for domestic textile companies
• More job opportunities in the U.S. textile industry
• Enhanced investment in local production capabilities

Though this helps local manufacturers, consumers bear the higher costs.

foreign competition

Foreign competition often benefits consumers by offering a variety of products at competitive prices. However, when tariffs are imposed, this competition is curtailed. The 100 percent tariff on Chinese textiles restricts the inflow of cheaper textiles. By doing so, the prices for U.S. textiles go up as cheaper alternatives become less available.
This can lead to:

• Decreased variety of available textile products
• Higher prices due to decreased competition
• Potential retaliation from foreign exporters who might impose tariffs on U.S. goods

Reduced foreign competition primarily benefits domestic producers but at the expense of consumers.

gains from trade

Gains from trade refer to the benefits that countries derive from engaging in international trade. These gains come from:

• Access to a broader array of goods and services
• Lower prices through competition
• Increased efficiency and innovation

By imposing a 100 percent tariff on Chinese textiles, the U.S. reduces its gains from trade. Consumers face higher prices and fewer choices. Similarly, China loses as it exports fewer textiles. The overall volume of beneficial trade between the two countries decreases, resulting in lower economic efficiency and missed opportunities for mutual growth.

import tax

An import tax, or tariff, is a tool that governments use to control the amount and value of goods imported into a country. In this case, the U.S. has levied a 100 percent tariff on Chinese textiles.
The primary effects include:

• Increased costs for imported goods
• Protection for domestic industries from foreign competition
• Decreased import quantities of the taxed goods

While domestic textile producers benefit, U.S. consumers and industries dependent on affordable textiles might suffer. They now have to pay higher prices, reducing their purchasing power and overall welfare. Tariffs can also lead to trade disputes and retaliation, complicating international trade relations.