Steel tariffs may hurt more than just the steel industry

The world is presently seeing a bout of 'economic nationalism' over steel. The US and China are just two countries who are raising tariffs on steel but this will have wide ranging implications for many.

A tariff is a tax on imports. The aim of raising the price of imports on the domestic market is to reduce demand for them. It is hoped that this will lead to import substitution, domestic consumers switch to domestically produced products. This will raise domestic output and employment and might reduce a current account deficit.

The diagram below shows the effects of the imposition of a tariff on steel by the Chinese on British made steel. (This is referred to in the BBC article linked below.)

Rather than analyse this standard graph today I want to look at the wider implications of the imposition of tariffs. Space will mean much of this article just suggests further investigation.


There are both gains and losses from using tariffs. When evaluating the imposition of a tariff we might look at the long-run and short-run implications, the effect on stakeholders, such as consumers, firms and governments and the advantages and disadvantages of the tariff.

There are no long-run justifications for putting a tariff on trade because it prevents specalization and the exploitation of comparative advantage. We know from economic theory that in the long- run everyone gains from trade. However in the short-run this might not be true. 

The article describes how China may be 'dumping' steel on the world market - that is selling steel below the cost of production. If this is the case then this is unfair and other countries steel industries will contract and jobs are lost. Even if the Chinese are not dumping (because they are able to produce steel more cheaply) another country might not want to see the sudden contraction of its steel industry with the resultant structural unemployment. Therefore in the short-run they protect their industry and manage its decline due to the loss of comparative advantage,

The stakeholders in the protected industry are often consumers. They lose out due to the imposition of tariffs because they pay higher prices and so lose consumer surplus. Another stakeholder is the government on the importing country. They gain tariff revenue and avoid paying greater unemployment benefits, both of which affect the government budget deficit. Notice here that the consumers who pay higher steel prices (by paying more for the goods made with steel) might be saved from higher taxes needed to pay unemployment benefits!

The static gains and loses represented by the diagram miss the dynamic gains and losses that can occur. The most obvious loss is that a trade war can result from placing tariffs on goods. This is evidenced in the article where one country imposing tariffs causes others to retaliate. The net effect is less overseas trade and slower economic growth worldwide. 

There are always more questions to ask in economics and students should look to find the right questions to ask to reach a valid judgement on the effects of any policy measure.

The BBC article is here 

This article is especially relevant to IB students who will find the tariff diagram is virtually always drawn at some point on Paper 2. However VCE and IB students need to practice evaluation - making a judgement based on economic theory and for that they need to ask wider questions about who is affected and how.