After you have studied Economics in the News, answer the following questions.

a. Why, in Fig.1, does a U.S. tariff on memory chips not increase U.S. production of these chips?

b. Why, when the United States imposes a tariff on chips imported from China, does the quantity of chips imported from Vietnam not equal the quantity previously imported from China?

c. Draw a graph to show who loses from China’s tariff on pork.

Transcribed Image Text:

The trade war between the United States and China has no winners. To see why, we'll look at two of the markets in which the trade war was played out: the U.S. market for memory chips and the Chinese market for pork. The Trump administration imposed a tariff on chips made in China and in response, China imposed a tariff on U.S. pork. Figure 1 illustrates what happened in the U.S. market for chips. The demand curve Dus shows the demand for memory chips in the United States, and the supply curve Sus shows the sup- ply of chips produced in the United States. China can supply chips at a price of $10 a chip, shown by the supply curve Schina. The United States can import chips at this price, so this is the price in the United States. With free trade, the United States produces no chips and imports 5 billion a year. When a tariff is imposed on imported chips, the U.S. demand curve and U.S. supply curve don't change, but the United States is no longer able to buy chips from China for $10 each. The U.S. price of chips from China rises, so American chip users look for a lower-cost source and find it in Vietnam, At a price of $11 a chip, the quantity of chips demanded and imported decreases to 4 billion a year. Imports from China are zero. U.S. chip users lose consumer surplus and the gray tri- angle shows the deadweight loss. Figure 2 illustrates what happened in China's market for pork. The demand curve Dchina shows the demand for pork in China, and the supply curve Schina shows the supply of pork produced in China. The world price of pork is $2 a pound, shown by the curve labeled WP. China can import pork at this price, so this is the price in China. With free trade, China produces 4 billion pounds of pork and imports 2 billion pounds a year. When China imposes a tariff on imported pork, the price of pork in China rises to WP + tariff. China's production increases and pork imports decrease. Chinese consumers of pork lose consumer surplus and the gray triangles show the deadweight loss. By removing the tariffs on chips and pork, both the United States and China gain.