Trade protectionism measures refer to form of policies aiming to restrict unfair competition generated from foreign nation. Protectionist policy is generally a defensive measures motivated politically. One common method of implementing protectionists measure is to impose tariff or tax on import. Direct impact of this policy is to raise the price of imported goods. Second way is to provide subsidy to local industries. Government now a day imposes a quantity restriction or import quota as an effective measure of protection (Helpman & Razin, 2014). The interventionist measures taken by the government affects macroeconomic stability of an economy. The paper discusses recent protectionists policy measure taken by Donald Trump and its likely consequences on economy of United State and Australia.
Analysis
Stability in macroeconomic equilibrium
Macroeconomic equilibrium is attained where planned injections in the economy matches with planned withdrawals. It is a stable economic equilibrium in the sense that that investment, government spending and export earnings match with taxation, saving and spending on imports. It also corresponds to equalization of planned aggregate demand and planned aggregate supply. Figure 1 portrait long run equilibrium in an economy.
Long run equilibrium is attained where potential long run supply (LRAS), short run aggregate supply (SRAS) and aggregate demand meet at a point. Any deviation in either of the three components interrupts stability in the economy and calls for correction. Classical economist suggested self-adjustment mechanism for correcting instability (Kawai & Takagi, 2015). Keynesian school of economists on the other hand suggested that government intervention is needed to correct instability in the economic state. Government use different stabilization tools depending on state of the economy.
Protectionist policy and its impact on United State
Donald Trump, the president of United State has shaken the international trade basis in terms of imposing a higher tariff on imported goods worth billions of dollar from EU, Mexico, China and Canada. The widening trades’ deficit of United State has held responsible behind such protectionists measures. Import restriction has mainly been placed on import of steel and aluminum (bbc.com, 2018). Hiking the tariff rate is not the only measure of protectionism. President has also abandoned Trans-Pacific Partnership and announced to deviate from North American Free Trade Agreement.
The impact of such protectionist measures on short run and long run equilibrium can be evaluated using the figure.
The initial stable equilibrium in the economy is shows at E. Protectionist policy measures would restrict inflow of final and intermediary goods export in United State. This alters the short run aggregate supply leftward to SRAS1. The new shirt run equilibrium occurs at point E1 with a lower real GDP at Y1. As actual GDP is less than the potential GDP, there is a negative output gap of the amount E1F. The supply shortage however leaves US companies to purchase from domestic sellers in US (Lowande, Jenkins & Clarke, 2018) The increased price and demand of domestic products encourage suppliers to supply more. The supply curve then shifts to outward and long run equilibrium is reinstated at E.
Protectionist policy and its impact on Australia
Protectionist policy of Donald Trump in the form of higher tariff initially has initially exempted any such measure on Australia (pwc.com.au, 2018). This though is a positive sign for Australian businesses the potential risk on Australian economy cannot be ignored. If tariffs are imposed on other industries, then this might impact Australia through reduced export. US however has imposed significant tariff on imports from China triggering a trade war between US and China. The resulted trade war has possible impact on Australian economy.
In the short run, the impact on Australian business will be limited as Australia until Australia is not targeted directly. Given the fact that Australia till now is exempted from the proposed import tariff and United State actually maintains a trade surplus with Australia, the nation is unlikely to come to closer target of such protectionist policy (dynamicbusiness.com.au, 2018). From short term perspective Australia might be benefitted from US-China trade war provided it can meet the substitute demand.
The long term impact on Australian economy however is uncertain. If the policy pursues in future and there is no political negotiation economy will be hit along with a decline in global economic growth.
The slow-down of China’s economy hurt Australian export reducing aggregate demand. Aggregate demand curve swings to the left to AD1. This changes the short run equilibrium to the left to E2. The economy is then left with a negative output gap of E2G. In the long run, aggregate demand however expands in response to weak Australian dollar and other external forces (Slopek, 2018). The aggregate demand thus back to AD restoring economic stability.
Welfare analysis of protectionist policy
The figure below illustrates the welfare impact of an imposed tariff. The proposed tariff by Donald Trump would alter surplus to consumers, producers and aggregate welfare.
Without tariff, the world price is given as PWorld. The imposition of tariff increases the price to Ptariff. The increase in price after tariff imposition reduces consumer surplus by the area A + B + C + D. As demand in the domestic market increases, producers enjoy an increased surplus of A. Volume of import lowered to (Q4 – Q3) from earlier (Q2 – Q1) (McGillivray, 2018). Government though earns a revenue shown by C, the society suffers a dead weight loss as given by the area B + D.
Conclusion
In view of on-going trade deficit of United State, President Donald Trump has announced some protectionists measures to restrict trade flow in United State. A significant higher tariff has been imposed on steel and aluminum coming from China, Mexico and some EU nation. In United State, immediate impact is to a reduction in aggregate supply. This though benefits domestic producers by raising but causes an overall welfare loss. Australia though is initially excluded from tariff imposition the impact on Australia is indirect. Australia impacted from resulted US-China trade war and an overall decline in global economic growth.
Reference list
bbc.com. (2018). What is a trade war and why should I worry? Retrieved from https://www.bbc.com/news/world-43512098
Helpman, E., & Razin, A. (2014). A theory of international trade under uncertainty. Academic Press.
Huang, R. (2018). How will Australian business be affected by Trump’s protection. Retrieved from https://www.dynamicbusiness.com.au/news/how-will-australian-business-be-affected-by-trumps-protection.html
Kawai, M., & Takagi, S. (2015). Improving Macroeconomic Stability. In Rebalancing for Sustainable Growth (pp. 65-102). Springer, Tokyo.
Lowande, K. S., Jenkins, J. A., & Clarke, A. J. (2018). Presidential particularism and US trade politics. Political Science Research and Methods, 6(2), 265-281.
McGillivray, F. (2018). Privileging industry: The comparative politics of trade and industrial policy. Princeton University Press.
pwc.com.au. (2018). Trump’s Trade War: what does this mean for Australian Businesses? Retrieved from https://www.pwc.com.au/tax/taxtalk/assets/alerts/trumps-trade-war-16mar18.pdf
Slopek, U. D. (2018). Export Pricing and the Macroeconomic Effects of US Import Tariffs. National Institute Economic Review, 244(1), R39-R45.
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