President Trump imposed a new 10 percent tariff on aluminum imports from Canada in fall 2020. The price of aluminum has increased from $1700 to $1800 per ton.
a) Even though the tariff was 10 percent, the price increased by just 6 percent. Why didn’t the price increase by the full 10 percent?
b) Who in the US economy is better off because of this tariff? Who is worse off? On the whole is the economy better or worse off? Explain your answer using supply and demand analysis (including a diagram), but without doing any calculation.
c) Suppose that before the tariff the US annually consumes 7.5 million metric tons of aluminum, of which 3.7 million are imported. With the 10 percent tariff, consumption has declined to 7.0 million metric tons of which 3 million would be imported. Calculate the change in consumer surplus and the change in producer surplus resulting from the tariff. How much better or worse off is the economy?
d) You own a company that sells aluminum-based products. You buy some of the aluminum from American firms and some you import from Canada and other countries. What advice would you give the President about the proposed tariff?