Protectionism

 In August, Canada announced a C$3.6 billion ($2.7 billion) tariff on US aluminum products. 

Before the tariff, OQ2 tons of aluminum was being consumed at a price of Pw. Domestic production was OQ1 and imports were Q1Q2. When the tariff is imposed, S (World) shifts up by the amount of the tariff to S (World) + tariff and the market price rice to Pw + T. Total Quantity demanded falls from OQ2 to OQ4 because the price has risen. 

Impact on domestic producers: Domestic producers increase production to OQ3 and so their revenue increases from g to g + a + b + c + h. However, the importers must pay a higher price for the imported goods. This will raise the costs to producers who need aluminum to manufacturer their products and eventually lead consumers to have to pay higher prices for such products. If the producer is an exporter, then the higher cost of imported components could reduce its international competitiveness. 

Impact on foreign producers:  Foreign producers supply Q3Q4. They receive Pw + T, but have to pay the tariff to the government. Thus, their revenue falls from h + i + j + k to only i + j. 

Impact on Canada’s government: The effect on the government is that it will receive tariff revenue of d + e. 

Impact on consumers: Because the producers who need aluminum to manufacturer their products now have higher costs, consumers will have to pay higher prices for such products. 

Impact on world efficiency: After the tariff, Q1Q3 tons of aluminum are now produced by relatively inefficient domestic producers, as opposed to more efficient foreign producers. The foreign producers would produce this quantity for a minimum revenue of h, whereas the domestic producers need a minimum revenue of h + c. Thus c represents the inefficiency of the domestic producers and a loss of world efficiency since more of the world's resources are being used to produce the tons of aluminum than are necessary. This is another dead-weight loss of welfare.

Why did Canada impose this protectionist tariff on aluminum? Trump imposed 10% tariffs on Canadian aluminum imports the day before this policy was proposed. These Canadian tariffs are in response to Trump’s policy, which was meant to defend the American aluminum industry. Canada’s goal is to increase the market share of its domestic aluminum producers, which will be achieved to some degree through this policy. However, as shown in the discussion above, this policy will also increase inefficiency in both the Canadian and American economies. 

This policy may be politically motivated. According to Canadian Deputy Prime Minister Chrystia Freeland, “We will impose dollar-for-dollar countermeasures in a balanced and perfectly reciprocal retaliation,” she said. “We will not escalate and we will not back down” (Breuninger). The Canadian government is willing to damage its own economy to retaliate against Trumps largely misguided tarriff bill. 

 

Works Cited 

“Canada Slaps Retaliatory Tariffs on US Aluminium Goods.” BBC News, 7 Aug. 2020, bbc.com/news/world-us-canada-53683569 .

Breuninger, Kevin. “Canada to Impose Tariffs on $2.7 Billion in U.S. Goods after Trump Reignites Trade Feud.” CNBC, 7 Aug. 2020, cnbc.com/2020/08/07/canada-to-impose-tariffs-on-2point7-billion-in-us-goods-after-trump-reignites-trade-feud.html .