Macroeconomic: Tariffs and the Aggregate Supply and Demand

Introduction

The Presidential nominee Donald Trump made a big deal about tariff’s and how the tariffs from other countries are affecting the US economy. A tariff is a tax on imported and exported goods, as a source of revenue (Berstein, J., 2018). As companies importing goods into the country face higher tariffs, the prices for the products would go up, this would allow products made in that country to be able to undercut the competition from another country. The question is, how are these tariffs going to affect the aggregate supply and demand of goods coming into the United States? The United States citizens have grown accustomed to a certain kind of life and paying a certain price for those goods.

U.S. Tariff War

Currently the United States is the leading importer of steel, currently President Trump has implemented a 25% tariff on all steel entering the country. Since imposing these tariffs, the price of steel has risen between 5 to 7 %, which makes the cost of building projects also rise (Massey, K., 2018). Since China started dumping millions of tons of steel and other goods into the US economy, US manufacturing jobs have gone to the way side. Currently the trade deficit between the United States and China is $375 billion, where the United States exports are $130 billion and the imports coming from China is $506 billion (Amadeo, K., 2018).

With tariffs increasing the price of imported goods, the United States is looking to bring back jobs from overseas back to US soil (Rainey, R., 2018). While the tariff war continues the demands for certain consumer goods will drop due to the increase in prices for the time being. Since prices are increasing on some imported goods, the domestic demand is rising (Berstein, J., 2018). Rising prices in steel and aluminum may cause contractors to pull back on the number of projects they can do or even pad the bid they place on a project to ensure they are not going to eat their profits (Massey, K., 2018). The pains of increasing prices and lower demand for imported good must be endured in order to try to bring an equilibrium to imported and exported good prices.

Make sure your essay is 100% unique

Our experts will write for you an essay on any topic, with any deadline and requirements from scratch

127 our experts are available
right now

Get custom essay

Aggregated Demand and Aggregated Supply

Since the tariff war with China people are unsure whether prices of goods will rise. When consumers are worried, they don’t spend a much which lowers the demands of products and slows the economy (Auerbach, M., 2014). While tariffs have normally been used to ensure domestic products will not become less expensive than good imported China has been able to undermine domestic products. Therefor the demand has shifted from domestic product to imported products. Since the products being imported from China have normally been able to be bought at a lower cost the demand of products coming from China have been in high demand. The rise in tariffs are to offset the price to give the products manufactured within the United States a higher demand (Rosyadi, S., 2018).

As seen in figure, the U.S. exports are not as high in demand as China’s imports. The supply and demand of products from both countries are not equal which is why the United States is now in a trade war with China. If the battle between the two countries continues it will hurt the consumers by driving prices up on products such as TV’s, computers, and cell phones. As seen in the section tariff war, prices have already risen on steel and aluminum. As demand for products decreases, the supply will also decrease which will increase the price. As the war continues, the effects won’t just be felt between China and the U.S., the effects will hit every country they deal with (Rosyadi, S., 2018).

Conclusion

In conclusion, the trade war between the United States and China can be a good thing for the short run but could cause a recession in the long run. This current method President Trump has enacted is the Keynesian approach by having the government interfere with the supply and demand rather than the classical approach of letting the free market go. He is putting U.S. jobs first and not letting us be undercut allowing money to leave our economy to China.

References

1. Amadeo, K. (2018, November 21). The Real Reason American Jobs Are Going to China. Retrieved November 22, 2018, from https://www.thebalance.com/u-s-china-trade-deficit-causes-effects-and-solutions-3306277
2. Auerbach, M. P. (2014). Aggregate Demand. In Business Reference Guide. The Principles of Macroeconomics & Microeconomics (pp. 50-55). Ipswich, MA: Salem Press. Retrieved from http://link.galegroup.com.ezproxy.libproxy.db.erau.edu/apps/doc/CX7012800013/GVRL ?u=embry&sid=GVRL&xid=a1917af4
3. Berstein, J. (2018, July 19). What are Tariffs and How do They Affect You. Retrieved November 20, 2018, from https://www.investopedia.com/news/what-are-tariffs-and-how-do-they-affect-you/
4. Branch, F. T. (2018, September). Foreign Trade: Data. Retrieved November 25, 2018, from https://www.census.gov/foreign-trade/balance/c5700.html
5. Massey, K. (2018). Trump’s tariffs: Steel builders weigh in. Arkansas Business, 35(16), 1-12. Retrieved from http://search.proquest.com.ezproxy.libproxy.db.erau.edu/docview/2031397124?accountid=27203
6. Rainey, R. (2018). Steelworkers demand tariff pay hike. Retrieved from U.S. edition
7. Rosyadi, S. A., & Widodo, T. (2018). Impact of Donald Trump’s tariff increase against Chinese imports on global economy: Global trade analysis project (GTAP) model. Journal of Chinese Economic and Business Studies, 16(2), 125. doi:10.1080/14765284.2018.1427930