PROBLEM SET # 3
- Answer the following questions based on the below diagram of the U.S. steel industry. For simplicity, you may assume that the United States is a “small country” (except in part c.), and please note that the precise numbers in this question are strictly hypothetical.
U.S. Steel Market
- Suppose that, between 1996 and 2000, the world price of steel fell from $400 to $300 per
ton, due to a global glut of steel resulting from financial crises in steel-exporting nations along with the appreciation of the U.S. dollar at the time. Assuming that the United States had free trade in steel during those years, calculate the effects (gains or losses in “surpluses”) on U.S. consumers and producers of steel and the net gain or loss to the U.S. economy.
Hint: To calculate the change in CS as price drops from $400 to $300, you need to add the area of the rectangle formed by the original quantity (130) with price of $400 and the $100 change in price to the area of the triangle formed with the base being the difference between the old quantity (130) at the price of $400 and the new quantity (150) at the price of $300. The area of a triangle is (1/2 *base * height) and the area of a rectangle is (base * height).
Hint: For PS, we need to find the change in area above the supply curve and between the price of $300 and $400. To do this, draw an imaginary line up from quantity 80 to the price of $400. This will create a rectangle of interest (base 80 and height 100) and a triangle (base 20 and height 100).
- Then, in 2001, the United States imposed a “safeguard” tariff of 10% on imports of steel. Assuming that the world price remained at $300 per ton, calculate the effects of the tariff on U.S. consumers, producers, the government, and the net gain or loss.
- Which part(s) of this analysis would you focus on if you were trying to prove the legal case for a safeguard tariff at the International Trade Commission (ITC)? Which part(s) of this would you focus on if you were opposed to the tariff? (Hint: look at your answers in part b to consider winners and losers)
- How might your answer to part b. be different if the U.S. was a “large country” in the global steel market (Hint, this will cause a terms of trade effect)? Indicate generally (exact calculations are not required, but you should draw a graph showing the terms of trade effect).
- Both “workers” (labor) and “capitalists” (owners of the firms/capital) in the U.S. steel industry supported the “safeguard” protection in 2001. Please explain considering the theorems within the Heckscher-Olin model.
- What if the government decided to impose a tariff rate quota. Show the results graphically (no calculations necessary) to include the net welfare effects if i) imports were less than the quota, ii) imports were greater than the quota. Indicate the returns to the government and / or quota rents in both examples. Who receives the quota rents?
- Refer to the graph in #3. Assume that the price of steel from Korea is $300 per ton and the price of steel from Brazil is $330.
- Assume the US originally placed a 33% tariff on Korean and Brazil steel. Then the US engages in a trade preferential trade agreement with Brazil, which removes the tariff on Brazilian steel. Will the agreement result in trade diversion or trade creation. Show the result by calculating the area of consumer surplus, producer surplus and change in government revenue.
- Repeat a, but assume that the US engages in a preferential trade agreement with Korea instead of Brazil. Will this agreement result in trade diversion or trade creation? Show the result by calculating the area of consumer surplus, producer surplus and change in government revenue.
Quantity of Steel �(in Millions of tons)
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