Image generated by ChatGTP-4o of new cars on a dealer’s lot.
This afternoon (April 2), President Donald Trump announced a sweeping increase in tariff rates on imported goods. The increases were by far the largest since the Smoot-Hawley Tariff of 1930. The United States will impose 10 percent across-the-board tariff on all imports, with higher tariffs being imposed on individual countries. Taking into account earlier tariffs, Chinese imports will be subject to a 54 percent tariff. Imports from Vietnam will be subject to a 46 percent tariff, and imports from the countries in the European Union will be subject to a 20 percent tariff.
President Trump’s objectives in imposing the tariffs aren’t entirely clear because he and his advisers have emphasized different goals at different times. The most common objectives the president and his advisers have offered for the tariff increases are these three:
- To increase the size of the U.S. manufacturing sector by raising the prices of imported manufactured goods.
- To retaliate against barriers that other countries have raised against U.S. exports.
- To raise revenue for the federal government.
The effects of the tariffs on the U.S. economy depend in part on whether foreign countries retaliate by raising their tariffs on imports from the United States and on whether, in the future, the president reduces tariffs in exchange for other countries reducing barriers to U.S. imports. For a background discussion of tariffs, see this post. Glenn and Tony discuss tariffs in this podcast, which was recorded on Friday afternoon (March 28). A discussion of the Smoot-Hawley Tariff can be found here.
The following Solved Problem looks at one aspect of the effects of a tariff increase.
Supports: Microeconomics and Economics, Chapter 6, Section 6.3.
Nearly every automobile assembled in the United States contains at least some imported parts. An article on axis.com made the following statement about the effect on U.S. automobile manufacturers of an increase in the tariff on imported auto parts: “If car prices [in the United States] go up, Americans will buy fewer of them, meaning less revenue ….” What assumption is the author of this article making about the demand for new automobiles in the United States?
Solving the Problem
Step 1: Review the chapter material. This problem is about the effect of price increases on a firm’s revenue, so you may want to review the section “The Relationship between Price Elasticity of Demand and Total Revenue.”
Step 2: Answer the question by explaining what must be true of the demand for new automobiles in the United States if an increase in automobile prices results in a decline in the revenue received by automobile producers. This section of Chapter 6 explains how the price elasticity of demand affects the revenue a firm receives following a price increase. A price increase, holding everything else constant that affects the demand for a good, always causes a decline in the quantity demanded. If demand is price inelastic, an increase in price will result in an increase in revenue because the percentage decline in quantity demanded will be smaller than the percentage increase in the price. If demand is price elastic, an increase in price will result in a decrease in revenue because the percentage decline in the quantity demanded will be larger than the percentage increase in price. We can conclude that the author of the article must be assuming that the demand for new automobiles in the United States is price elastic.
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