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C h a p t e r

15 INTERNATIONAL
TRADE POLICY

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Answers to the Review Quizzes
Page 380
1. Describe the situation in the market for a good or service that the United States imports.
The goods and services the United States will import are those in which the United States has a
higher opportunity cost of production relative to other countries. In those markets the U.S. no-
trade price is higher than the world price. With trade the quantity produced in the United States is
less than the quantity consumed and the difference is imported.
2. Describe the situation in the market for a good or service that the United States exports.
The goods and services the United States will export are those in which the United States has a
lower opportunity cost of production relative to other countries. In those markets the U.S. no-trade
price is lower than the world price. With trade the quantity produced in the United States exceeds
the quantity consumed and the excess is exported.

Page 381
1. How is the gain from imports distributed between consumers and domestic producers?
Consumers gain from imports and domestic producers lose from imports.
2. How is the gain from exports distributed between consumers and domestic producers?
Consumers lose from exports and domestic producers gain from exports.
3. Why is the net gain from international trade positive?
The net gain from international trade is positive because the gain to the winners exceeds the losses
to the losers. For instance, in the case of an imported good, the gain to consumers exceeds the loss
to producer so society gains on net. The situation is similar for exports: The gain to producers
exceeds the loss to consumers..

Page 387
1. What are the tools that a country can use to restrict international trade?
A country can use tariffs, import quotas, other import barriers such as health, safety, and
regulation barriers, and voluntary export restraints to restrict international trade. Export subsidies
also decrease other countries’ exports and restrict their international trade.
2. Explain the effects of a tariff on domestic production, the quantity bought, and the price.
A tariff raises the domestic price of the product. The higher price increases domestic production
and decreases the domestic quantity purchased.
3. Explain who gains and who loses from a tariff and why the losses exceed the gains.
Domestic consumers lose from the tariff. Domestic producers gain from the tariff. The government
also gains revenue from the tariff. But the gain to producers plus the gain in government revenue
is less than the loss to consumers, so on net a tariff creates a social loss. There is a social loss for
two reasons: First, high-cost domestic production expands, so society uses more resources
producing some high-cost units of the good than it would use if low-cost foreign units were
purchased. Second the high price leads domestic consumers to decrease their consumption of the
good, thereby robbing society of the benefits these units would have produced.
4. Explain the effects of an import quota on domestic production, consumption, and price.
An import quota raises the domestic price of the product. The higher price increases domestic
production and decreases domestic purchases.
5. Explain who gains and who loses from an import quota and why the losses exceed the gains.
Domestic consumers lose from the import quota. Domestic producers gain from the import quota.
The importers also gain additional profit from the import quota. But the gain to producers plus the
importers’ profits is less than the loss to consumers, so on net an import quota creates a social loss.
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There is a social loss for two reasons: First, high-cost domestic production expands, so society uses
more resources producing some high-cost units of the good than it would use if low-cost foreign
units were purchased. Second the high price leads domestic consumers to decrease their
consumption of the good, thereby robbing society of the benefits these units would have produced.

Page 391
1. What are the infant industry and dumping arguments for protection? Are they correct?
The attempt to stimulate the growth of new industries is the infant-industry argument for
protection, which states that it is necessary to protect a new industry from import competition to
facilitate the growth of that industry, making it competitive in the world markets. This argument is
based on the concept of dynamic competitive advantage. Learning-by-doing is a powerful engine
of productivity growth. However the learning-by-doing argument for protection only works if the
benefits also spill over into other industries and other parts of the economy. This is rarely the case,
as the entrepreneurs of infant industries and their financial supporters take this risk into account
and all returns usually accrue only to them, not to other industries. And it is more efficient to
subsidize the infant industry needing protection than it is to protect it by restricting trade.
The dumping argument for protection states that a foreign firm is selling its exports at a lower
price than its cost of production. Foreign firms trying to monopolize the international market may
use this practice. Once the competition is gone, the foreign firm will raise prices and reap profits.
This argument fails for several reasons. First, it is virtually impossible to detect the occurrence of
dumping since it is impossible to verify a firm’s production costs. The test most commonly used is
if the export price is lower than the import price. This test only examines the supply side of the
two markets and ignores the demand side. If the domestic market is inelastic and the export market
is elastic (which is almost always the case) then it is natural for a firm to price the domestic goods
higher than the exports. Second, it is difficult to see how a global firm could have a monopoly for
the goods or services it exports. There are too many foreign suppliers (and potential suppliers),
making global competition too extensive for a monopoly to exist in the global market. And, even
if there is global monopoly it is more efficient to regulate it than to impose trade restrictions on its
products.
2. Can protection save jobs and the environment and prevent workers in developing countries
from being exploited?
There are many myths about trade restrictions. The problem mentions three of them, all false
reasons often offered as reasons to restrict international trade. These arguments are:
 Trade restrictions save domestic jobs: This argument ignores the fact that, under free trade,
consumers in the importing country will have greater disposable income and citizens in the
exporting countries will have greater incomes. This means total demand for the goods and
services that are exported by our domestic industry increases, increasing the number of jobs
created in the domestic industries under free trade.
 Trade restrictions penalize lax environmental standards: Not all developing countries have
lax environmental standards. Also, a clean environment is a normal good. Countries that are
relatively poor and have lax pollution standards do not care as much about the environment
because imposing clean air, water, and land standards have a high opportunity cost because
they will slow economic development. The best way to encourage environmental quality is
not to restrict economic development but to encourage rapid economic growth, which will
more quickly increase citizen demand for a cleaner environment in those developing
countries.
 Trade restrictions prevent rich countries from exploiting poorer countries: Importing goods
made in countries with low wage levels increases the demand for labor in those countries,
increasing the number of jobs available and raising wages over time. The more free trade that
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occurs with these countries, the more quickly the wages will rise and the working conditions
will increase in quality and safety.
3. What is offshore outsourcing? Who benefits from it and who loses?
Offshore outsourcing occurs when a firm in the United States buys finished goods, components, or
services from firms in other countries. Workers who have skills for jobs that have been sent abroad
lose from offshore outsourcing. Consumers who consume the goods and services produced abroad
and imported into the United States benefit.
4. What are the main reasons for imposing a tariff?
There are two main reasons for imposing tariffs on imports. First the government receives tariff
revenues from imports, which can be useful when revenues from income taxes and sales taxes are
less effective ways of gaining government revenue. Second rent seeking by individuals in
industries that would be hurt by foreign competition can influence the government to impose
tariffs.
5. Do the winners from free trade win the political argument? Why or why not?
Trade restrictions are enacted despite the inherent inefficiency because of the political actions of
rent seeking groups, which fear that foreign competition might have a negative impact on their
industry, firm, or jobs. The anti-trade groups are easily organized and have much to gain from
trade restrictions, whereas the vast millions of consumers, who would win from free trade, are
difficult to organize because each individual has only a small amount of loss when trade
restrictions are imposed. Hence the winners from free trade frequently lose the political argument
because the winners from trade restrictions out-lobby the winners from free trade.

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Answers to the Study Plan Problems and Applications

Use the following data to work Problems 1 to
Price Quantity Quantity
3.
(dollars per demanded supplied
Wholesalers buy and sell roses in containers
container) (millions of containers per year)
that hold 120 stems. The table provides
information about the wholesale market for 100 15 0
roses in the United States. The demand 125 12 2
schedule is the wholesalers’ demand and the 150 9 4
supply schedule is the U.S. rose growers’ 175 6 6
supply. Wholesalers can buy roses at auction 200 3 8
in Aalsmeer, Holland, for $125 per container. 225 0 10
1. a. Without international trade, what would be the price of a container of roses and how many
containers of roses a year would be bought and sold in the United States?
Without international trade, in the United States the price of a container of roses is $175 and 6
million containers of roses are bought and sold.
b. At the price in your answer to part (a), does the United States or the rest of the world have a
comparative advantage in producing roses?
The price of roses in the United States exceeds the price in the rest of the world, so the rest of the
world has a comparative advantage in producing roses.
2. If U.S. wholesalers buy roses at the lowest possible price, how many do they buy from U.S.
growers and how many do they import?
The price of roses in the United States is $125 per container. At this price, U.S. rose growers
supply 2 million containers per year and U.S. wholesalers demand 12 million containers of roses.
U.S. wholesalers buy the 2 million containers from U.S. growers and purchase 10 million
containers from foreign sources, which are imported into the United States.
3. Draw a graph to illustrate the U.S. wholesale
market for roses. Show the equilibrium in that
market with no international trade and the
equilibrium with free trade. Mark the quantity
of roses produced in the United States, the
quantity imported, and the total quantity bought.
In Figure 15.1, the equilibrium without
international trade is determined at the
intersection of the demand curve and the
supply curve. Without international trade the
equilibrium price is $175 per container and 6
million containers per year are bought and
produced. With international trade the world
price is $125 per container, as shown in Figure
15.1. The quantity produced in the United
States is 2 million containers and the quantity
bought in the United States is 12 million
containers. Imports into the United States
account for the difference between the quantity
bought and the quantity produced, 10 million containers.

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4. Use the information on the U.S. wholesale market for roses in Problem 1 to
a. Explain who gains and who loses from free international trade in roses compared to a
situation in which Americans buy only roses grown in the United States.
U.S. rose wholesalers, who are the consumers in the problem, gain from free international trade.
U.S. rose growers lose from free international trade.
b. Calculate the value of the roses imported into the United States.
The United States imports 10 million containers of roses per year. The price of a container is $125,
so the value equals (10 million containers) × ($125 per container), $1.25 billion.
Use the information on the U.S. wholesale market for roses in Problem 1 to work Problems 5 to 10.
5. If the United States puts a tariff of $25 per container on imports of roses, explain how the U.S.
price of roses, the quantity of roses bought, the quantity produced in the United States, and the
quantity imported changed.
The U.S. price of roses rises from $125 per container (the price with free trade) to $150 per
container. The quantity of roses produced in the United States increases from 2 million containers
(the quantity produced with free trade) to 4 million containers. The quantity of roses consumed in
the United States decreases from 12 million containers (the quantity consumed with free trade) to
9 million containers. The quantity imported decreases from 10 million containers to 5 million
containers.
6. Who gains and who loses from this tariff?
U.S. rose consumers lose from the tariff. U.S. rose producers gain from the tariff. The U.S.
government gains revenue from the tariff.
7. Draw a graph of the U.S. market for roses to illustrate the gains and losses from the tariff and
on the graph identify the gains and losses, and the tariff revenue.
Figure 15.2 shows the effect of the tariff. The
amount of the tariff is equal to the height of the
light gray arrow. In the United States, the price
of a container of roses rises from $125 per
container to $150 per container. Before the
tariff U.S. rose producers grew 2 million
containers per year; after the tariff they increase
their production to 4 million containers per
year. This change is shown in the figure by the
movement from point a to point b. Before the
tariff U.S. rose wholesalers, the consumers in
this problem, purchased 12 million containers
per year; after the tariff they decrease their
consumption to 9 million containers per year.
This change is shown in the figure by the
movement from point c to point d. The quantity
of roses imported decreases from 10 million
containers per year before the tariff to 5 million
per year after the tariff and a tariff of $25 per
container is imposed. The tariff revenue is equal to 10 million containers × $25 per container,
which is $250 million and is illustrated in Figure 15.5 as the area of the grey rectangle.

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8. If the United States puts an import quota on roses of 5 million containers, what happens to the
U.S. price of roses, the quantity of roses bought, the quantity produced in the United States,
and the quantity imported?
The U.S. price of roses rises to $150 per container. 9 million containers of roses are purchased in
the United States and 4 million containers of roses are produced in the United States. The
difference, 5 million containers, is imported into the United States.
9. Who gains and who loses from this quota?
U.S. rose growers and importers of roses gain from the quota. U.S. rose wholesalers lose from the
quota.
10. Draw a graph to illustrate the effects of the import quota and on the graph identify the
importers’ profit.
Figure 15.3 shows the effect of the import
quota. The amount of the quota is equal to the
length of the grey arrow. The price in the
United States rises from $125 per container to
$150 per container. Before the import quota
U.S. rose producers grew 2 million containers
per year; after the import quota they increase
their production to 4 million containers per
year. This change is shown in the figure by the
movement from point a to point b. Before the
import quota U.S. rose wholesalers, the
consumers in this problem, purchased 12
million containers per year; after the import
quota they decrease their consumption to 9
million containers per year. This change is
shown in the figure by the movement from
point c to point d. The quantity of roses
imported decreases from 10 million containers
per year before the import quota to 5 million
per year after the tariff. U.S. producers receive $150 per container while foreign producers receive
the world price, $125 per container. The difference, $25 per container, goes to the importers as
added profit. The total added profit is equal to 10 million containers × $25 per container, which is
$250 million and is illustrated in Figure 15.5 as the area of the grey rectangle.
11. China Drug Sales to the U.S. Grow Despite Safety Concerns at Homes
Chinese exports of pharmaceutical products and health supplements worldwide jumped 3
percent to $56 billion last year. Chinese pharma exports to the U.S. rose 4 percent. Questions
are being asked in China about the safety of its medicines.
Source: Bloomberg News, August 30, 2016
a. What does the news clip imply about the comparative advantage of producing pharma-
ceuticals in the United States and China?
Because the pharmaceutical products and health supplements are produced in China, the news clip
suggests that China has the comparative advantage in producing these pharmaceutical products
and health supplements.
b. Could product quality be a valid argument against free trade? If it could, explain how.
Product quality is not a valid argument against free trade. Quality is a valid concern for
consumers. If consumers cannot judge quality themselves, then government inspection might be
necessary. But in that case government inspection of both imported and domestically produced

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goods is required. To single out imported goods or services makes little sense.

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Answers to Additional Problems and Applications

12. Suppose that the world price of sugar is 10 cents a pound, the United States does not trade
internationally, and the equilibrium price of sugar in the United States is 20 cents a pound.
The United States then begins to trade internationally.
a. How does the price of sugar in the United States change?
The price of sugar in the United States falls.
b. Do U.S. consumers buy more or less sugar?
As a result of the lower price, U.S. consumers buy more sugar.
c. Do U.S. sugar growers produce more or less sugar?
As a result of the lower price, U.S. growers produce less sugar.
d. Does the United States export or import sugar and why?
The United States imports sugar. The quantity of sugar demanded increases while quantity
supplied decreases. The difference is made up by imports.
13. Suppose that the world price of steel is $100 a ton, India does not trade internationally, and the
equilibrium price of steel in India is $60 a ton. India then begins to trade internationally.
a. How does the price of steel in India change?
The price of steel in India rises to equal the world price.
b. How does the quantity of steel produced in India change?
Producers respond to the higher price by increasing the quantity of steel produced.
c. How does the quantity of steel bought by India change?
Steel users in India respond to the higher price by decreasing the quantity of steel bought.
d. Does India export or import steel and why?
Because the price of steel in India is lower than the world, India has a comparative advantage in
the production of steel. India will export steel.
14. A semiconductor is a key component in
your laptop, cell phone, and iPod. The Price Quantity Quantity
table provides information about the (dollars per demanded supplied
market for semiconductors in the United unit) (billions of units per year)
States. Producers of semiconductors can 10 25 0
get $18 a unit on the world market. 12 20 20
a. With no international trade, what would 14 15 40
be the price of a semiconductor and how 16 10 60
many semiconductors a year would be 18 5 80
bought and sold in the United States? 20 0 100
With no international trade the price of a semiconductor in the United States is $12 per unit. 20
billion units are bought and sold in the United States.
b. Does the United States have a comparative advantage in producing semiconductors?
The United States has a comparative advantage in producing semiconductors because the U.S.
price is lower than the price in the world market.
15. Biofuel Goals Could Require All the World’s Crops
Biofuels to combat global warming and cut carbon emissions are diverting corn from food to
fuel, and a World Resources Institute report says meeting a 20 percent bioenergy target in
2050 would need the world’s annual harvest of plant material to double.
Source: CBS News, January 29, 2015

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a. What is the effect on the world price of corn of the increased use of corn to produce biofuel?
The use of corn to produce ethanol increased the demand for corn, thereby raising the price of
corn.
b. How does the change in the world price of corn affect the quantity of corn produced in a poor
developing country with a comparative advantage in producing corn, the quantity it
consumes, and the quantity that it either exports or imports?
The higher world price of corn decreases the consumption of corn and increases the production of
corn in poor developing countries. Because the country has a comparative advantage it will export
corn. The higher price leads the country to increase its exports.
16. Draw a graph of the market for corn in the poor developing country in Problem 15(b) to show
the changes in the price of corn, the quantity produced, and the quantity consumed by people
in that country.
In Figure 15.4, the initial world price of corn
was $6 per bushel. With the use of biofuels that
require corn, the world price rises to $8 per
bushel. The higher world price increases the
production of corn. Production moves from
point a on the supply curve to point b; that is,
production in the poor country increases from 5
million bushels to 6 million bushels.
Consumption of corn, however, decreases.
Consumption in the poor country moves from
point c on the demand curve to point d; that is,
consumption decreases from 3 million bushels
per year to 2 million bushels.

Use the following news clip to work Problems 17 and 18.

Watch Out USA—Haggis Could Be on Its Way
Scottish haggis made from sheep’s heart, liver, and lungs, mixed with oatmeal and spices, has been
banned in the United States since 1971. The Scottish government expects the ban to soon be lifted.
Source: CNNMoney, November 23, 2016
17. a. Explain how the U.S. import ban on haggis affected haggis producers and consumers in
Scotland.
The U.S. import ban lowered the price of haggis in Scotland. The lower price led to decreased
production in Scotland, which made Scottish producers worse off. The lower price also led to
increased consumption in Scotland, which made Scottish consumers better off.

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b. Draw a graph of the market for haggis in

Scotland to illustrate your answer to part (a).
Identify the changes in the price of haggis, the
quantity produced and the quantity consumed in
Scotland.
Figure 15.5 shows the effect of the U.S. import
ban. Prior to the ban, presuming the only Scottish
exports of haggis were to the United States, the
price of haggis in Scotland was $5 per pound. At
this price the quantity consumed in Scotland was
30,000 pounds of haggis per year (point a on the
demand curve) and the quantity produced in
Scotland was 80,000 pounds per year (point b on
the supply curve). The difference, 50,000 pounds
per year, was exported to the United States. With
the import ban, the price of haggis in Scotland
falls to $4 per pound. At this price 60,000 pounds
of haggis per year are produced and consumed in
Scotland (point c). There are no exports.

18. a. Explain how lifting the U.S. import ban on haggis affects producers and consumers of haggis
in the United States.
Lifting the U.S. ban lowers the price of haggis in the United States. U.S. consumption increases
and U.S. production decreases so U.S. consumers are better off and U.S. producers are worse off.
b. Draw a graph of the U.S. market for haggis to illustrate your answer to part (a).
Figure 15.6 shows the situation in the U.S.
market for haggis. With no trade the U.S. price
of haggis is $6 per pound. The United States
produces and consumes 30,000 pounds of
haggis. When the U.S. import ban is
eliminated, the price in the United States falls
to $5 per pound. U.S. production falls to
20,000 pounds per year and U.S. consumption
rises to 50,000 pounds. The difference, 30,000
pounds, is imported from Scotland.

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Use the following information to work Problems 19 to 21.

Before 1995, trade between the United States and Mexico was subject to tariffs. In 1995, Mexico
joined NAFTA and all U.S. and Mexican tariffs have gradually been removed.
19. Explain how the price that U.S. consumers pay for goods from Mexico and the quantity of
U.S. imports from Mexico have changed. Who are the winners and who are the losers from
this free trade?
With NAFTA, the prices that U.S. consumers pay for goods from Mexico have fallen and, as a
result, the quantity of imports from Mexico have increased. Winners from this free trade are
Mexican producers of goods exported to the United States and U.S. consumers of these goods.
Losers are Mexican consumers of the goods and U.S. producers of the goods.
20. Explain how the quantity of U.S. exports to Mexico and the U.S. government’s tariff revenue
from trade with Mexico have changed.
The prices of U.S. goods in Mexico have fallen and, as a result, the quantity of U.S. goods
exported to Mexico has increased. The U.S. government’s tariff revenue from tariffs imposed on
trade with Mexico decreased.
21. Suppose that in 2015 tomato growers in Florida lobby the U.S. government to impose an
import quota on Mexican tomatoes. Explain who in the United States would gain and who
would lose from such a quota.
U.S. tomato growers gain from such a quota. The importers who hold the quota rights also gain.
U.S. consumers of tomatoes lose from such a quota.
Use the following information to work Problems 22 and 23.
Suppose that in response to huge job losses in the U.S. textile industry, Congress imposes a 100
percent tariff on imports of textiles from China.
22. Explain how the tariff on textiles will change the price that U.S. buyers pay for textiles, the
quantity of textiles imported, and the quantity of textiles produced in the United States.
The tariff raises the U.S. price of textiles. As a result, the quantity of textiles consumed in the
United States decreases and the quantity produced increases. Imports of textiles into the United
States decrease.
23. Explain how the U.S. and Chinese gains from trade will change. Who in the United States will
lose and who will gain?
The decrease in trade means that the U.S. and Chinese gains from trade decrease. In the United
States, U.S. producers gain from the tariff. The U.S. government also gains revenue from the
tariff. U.S. textile consumers lose.
Use the following information to work Problems 24 and 25.
With free trade between Australia and the United States, Australia would export beef to the United
States. But the United States imposes an import quota on Australian beef.
24. Explain how this quota influences the price that U.S. consumers pay for beef, the quantity of
beef produced in the United States, and the U.S. and the Australian gains from trade.
The quota raises the price of beef in the United States. By raising the U.S. price, the quota
increases the quantity of beef produced in the United States and decreases the quantity of beef
consumed in the United States. The U.S. and Australian gains from trade decrease.
25. Explain who in the United States gains from the quota on beef imports and who loses.
U.S. beef producers gain from the quota. The people who hold the import quota rights also gain.
U.S. beef consumers lose from the quota.

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26. The Cost of Bringing Home American Jobs

Donald Trump says he’ll bring home jobs lost to China and Mexico. It is possible but costly.
American consumers would face higher prices and those on low incomes would suffer most
because they spend a high share of their income on clothes, shoes, and toys—things that are
made at low cost and imported.
Source: CNNMoney, April 14, 2016
a. What are the arguments for bringing jobs back to America? Explain why these arguments are
faulty.
The primary argument advanced for being jobs back to America is that it will increase
employment in America and the benefits to the U.S. workers who gain these jobs outweigh the
costs of restricting trade. The fact this argument is off base is demonstrated by comparing the cost
of saving a job to the wage paid on the job. The cost of restricting trade falls on American
consumers, especially low-income Americans, who would face higher prices for imported products
such as clothes, shoes, and toys. The cost inflicted on U.S. consumers from higher prices
outweighs the benefit of a job to the worker, that is, the wage rate paid on the job.
b. Is there any merit in bringing jobs back?
There is merit to the workers whose jobs are being brought back and who might not receive any
government assistance if their jobs are not protected. There also is merit to the politicians who can
obtain a reward from lobbyists for the protection. There is no merit, however, to society as a
whole.

Economics in the News

Economics in the News
27. After you have studied Economics in the News on pp. 392–393, answer the following
questions.
a. What was the value of U.S. imports from Mexico in 2015 and why would the value of
imports fall if a 20 percent tariff were imposed on them?
U.S. imports from Mexico were $303 billion in 2015. A 20 percent tariff would raise the price of
imports, thereby decreasing the quantity of goods and services imported as U.S. consumers
decrease the quantity they demand while U.S. producers increase the quantity they supply.
b. How do the elasticities of demand and supply influence the revenue that a tariff generates?
The elasticities of demand and supply affect the revenue a tariff will raise because they determine
the quantity that will be imported after the tariff is imposed. Imposing a tariff on Mexican imports
raises their price in the United States. If the U.S. demand and U.S. supply for these imports are
very inelastic, then the quantity demanded will decrease only slightly while the quantity supplied
will increase only a little. Both effects lead to a small decrease in imports and, accordingly, a large
amount of tariff-generated revenue.
c. Who in the United States would benefit and who would lose from a 20 percent tariff on
imports from Mexico?
U.S. producers of import-competing products would benefit from a tariff. So, too, would the U.S.
government because it would gain revenue. U.S. consumers would lose. Overall the United States
loses.

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d. Illustrate your answer to part (c) with an appropriate graphical analysis.

Figure 15.7 shows the effect of the tariff.
Before the tariff, the price is $50 per unit,
indicated by the line labeled PW. The
United States produces 1.67 million units
and consumes 7 million units, so the
United States imports 5.33 million units
from Mexico. The 20 percent tariff raises
the price in the United States to $60 per
unit, shown by the line labeled PW + tariff.
At this price the United States produces
2.33 million units and consumes 5 million
units, thereby importing 2.67 million. U.S.
producers gain because of the rise in price
and U.S. consumers lose because of the rise
in price. The government gains because it
gains tariff revenue.

28. Argentina’s Lesson for Trump: Tariffs

Made Poverty Worse
In 2011, Argentina wanted to protect manufacturing workers, so it imposed a 35 percent tariff
on imported smartphones, computers, and tablets. Blackberry moved jobs to Argentina, but
Apple and others passed. Compare Argentine and U.S. prices: iPhone 7 Plus $1,400 versus
$869; iPad Pro $1,300 versus $699. Argentina is now removing this tariff.
Source: CNNMoney, April 7, 2017
a. Explain how Argentina’s tariff on smartphone and tablet imports changes the country’s
production, consumption, and imports of these items. Illustrate your answer with an
appropriate graphical analysis.
The tariff on smartphone and tablet imports
raises their price in Argentina. The higher
price increases Argentinian production and
decreases both Argentinian consumption
and importation.
Figure 15.8 illustrates the situation for an
iPad Pro. With no tariff, the price would be
$699, indicated by the line labeled PW.
Argentinian producers would manufacture
1 million iPads and Argentinian consumers
would purchase 6 million iPads, so 5
million iPads would be imported. The tariff
raises the price to $1,300, shown by the
line labeled PW + tariff. At this price,
Argentinian producers manufacture 2.5
million iPads and Argentinian consumers
purchase 3 million iPads, so 500,000 iPads
are imported.

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b. Show on your graph the changes that result from the tariff on smartphones and tablets.
Before there is a tariff, the Argentinian consumers pay a lower price, $700 per iPad Pro, and buy
more iPads, 6 million, then after the tariff, when they pay $1,300 for an iPad pro and consume
only 3 million iPad Pros. The tariff harms Argentinian consumers. Before the tariff, Argentinian
producers receive a lower price, $700 per iPad Pro, and produce fewer iPads, 1 million, then after
the tariff, when they receive $1,300 for an iPad pro and manufacture 2.5 million. The tariff
benefits Argentinian producers.
c. Who in Argentina will oppose the tariff cuts?
Opposing the tariff cuts will be those who gain from the tariffs, specifically the producers and
perhaps some in the government, which gains tariff revenue.

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© 2018 Pearson Education, Inc.