Video Transcript: Tariffs and Protectionism

Hello, welcome back. In this video, we're going to discuss tariffs and  protectionism. So, protectionism is the economic policy of restraining trade  through tariffs, quotas, or other regulations that burden foreign producers but not domestic producers. Right? A tariff is a tax on imports. Right, so if we are  importing Japanese cars and we don't want them to compete with domestic  U.S.-made cars, right, we might slap a 30% tariff on those cars that come in, so  that we will either make them more expensive than the domestically made cars,  or we will have those prices compete with our domestic producers if they come  in cheaper, right? So a quota is a restriction on the quantity of goods that can be imported, right? So we can only have so much of a product come in. Therefore,  supply has a ceiling, and therefore the price can be either restricted or or set a  ceiling on as well. So we're going to discuss and graphically show and illustrate  how quotas and tariffs and other trade restrictions on a global scale affect the  world economy, world supply, and world prices. Right. So we're going to really  discuss. So this is this is your supply and demand curve. Right. So we have this  is this is just for domestic trade in this example. Right. There's there's no free  trade. This is all domestic demand, domestic supply, right? So for  semiconductors, so we find an equilibrium price, right? So this is our price in the  market. This is the quantity sold in the market for our firm at the equilibrium price that will allow us to maximize profit. Notice this is only domestic production. This  is no international production or imports involved, right? So the next slide. Now  this looks a little more involved, so let's discuss this and take some time, right?  So now we're incorporating the real global economy. Okay, so so because we  are only buying in this slide, domestically, right? There's no competition from  outside firms. Okay, so so in this example, we're going to see that now we're  going to implement the world price because for these semiconductors, whatever domestic nation this was, they are now allowing for imports of the  semiconductors, right? So now they have got to price down, right, to the world  supply price. Okay, you'll notice this line here is the world price. Okay, but look,  we were charging much more. The domestic firm was charging much more for  the semiconductors because there was no competition from imports, right? So  now that this domestic economy has opened up their markets to to international  trade, there is more supply now coming into this domestic country of  semiconductors. There's more supply coming in, so naturally with more supply  but the same demand, right? We're going to push prices down, right? So now  we no longer are going to be buying. Consumers will no longer be buying at this  higher no free trade equilibrium price. Now they are going to be paying a  cheaper price because there's more supply and there is the same demand for  this domestic economy, right? So now we can see how it's going to impact price  and it's going to impact demand. So if you look at the downward sloping curve,  the domestic demand curve, and then you look at the world price, where the  where the world price intersects the supply and demand curves. Now you'll 

notice where demand is right and where supply is right. So now at this, so now  we have supply at this quantity right. We had supply here at this quantity right at  equilibrium with no free trade, but now if you'll notice, the supply decreases right from our domestic producers of semiconductors. Now our supply has gone  down. Why? Because the price has gone down. We are not willing to produce as many semiconductors at a lower price, right? But if you look on the other side of  this, right, our downward sloping demand curve now intersects with the world  price, and at a cheaper price, demand has increased, right? So demand for this  product for the semiconductors. Went up, right? So now they're willing to  demand more than they were at the equilibrium price. Notice Q no trade here,  right? Consumers were only demanding this amount, right? This quantity. But  now that we've introduced international trade, we are receiving imports of  semiconductors, now the quantity demanded with the free trade has moved out  along the curve, right, and it's grown larger. While the surprise, the price, if you'll notice, with no trade here, here is the price that our domestic producers were  selling at. As it went down, now the suppliers aren't willing to supply as much.  Therefore, this trade here is all relative to imports, and here is the domestic  production. So now you can see that domestic production has really been  impacted by allowing international markets to come in and serve our domestic,  our domestic market, right? So this now has become the sale area of  semiconductors for imports, right? So now we're selling now our consumers or  wherever this domestic nation is is buying imports here. They're buying foreign  semiconductors. All of these sales in this area are now sold as imports, right?  So now our domestic producers have really have really taken a pinch as this  world price has come down through the introduction of international  semiconductors. So now you can see why the supply of our domestic supply is  shrinking, right? Because we have more competition come in, and now it is  pushing producers, domestic producers. It's pushing them out of business, and  they're pushing them out of the market because now we have cheaper foreign  supply coming in. So now the domestic production are is probably only going to  be maintained by the major players in this space, right? There's going to be  better opportunity cost for other semiconductor makers to get out of that  business and go put their money and invest it somewhere else and have a  better return as the world price comes down and sees this downward pressure.  It's going to produce. It's going to push producers out of the market, right?  Because we have the new international imports coming in, right? So now  production on the domestic scale is really being pinched here, right? So now  let's look at let's look at what happens when there is a tariff slapped on these  new semiconductors coming into our domestic market. What happens here,  right now? What does a tariff do? It's a tax on a good that comes into the  country, right? So now, because we see here the impact of the domestic or the  international imports coming into our domestic market, and we see, let's say, as 

a government organization, our government sees how this is impacting our  domestic producers, and it's putting a lot of our domestic producers out of  business because the cheaper price and the and the cheaper supply is coming  into our market, right? So now, in order to make our domestic producers more  competitive, we are going to put a tariff on these semiconductors, right? So  what's going to happen when we put, let's say, a 30% tariff on the price, right?  It's going to increase, right? The price is going to go up, so therefore you can  see the shift from the original world price right here, right? So here's our original  world price, okay? With the with the imports coming in, same here, right? Now  we put the let's say hypothetically 30% tariff, right, on these semiconductors. So  what happened to the price? The price went up, right? The price goes up. Now  we have a new international world supply plus tariff price. Okay, so what  happens here? Right, our now you can see automatically. So so here is our here is our demand curve, right, and here is our supply curve, right? And here is our  new price. Okay, here is our new price. So our demand curve intersects here,  okay, and our supply curve intersects here with the new world price plus tariff.  Remember, there's a new price. The tariff created a new price, so now we have  new supply and demand points on this curve, right where we intersect with  price. Now, if you'll notice, so the supply, right, of international semiconductors  coming into our domestic market, now that has shrunk. Look, see how we have  shifted. Over where the prices, where the points no longer, where the price,  where the points intersect, right? It's shifting, right? Because now, because of  this tariff, we are no longer receiving as many semiconductors as imports as we  once were. Because now, because of the tariff, it may be cheaper for these  international producers of these semiconductors to sell more in their domestic  economy or sell more outside of sell more to nations that do not have tariffs,  right? So now because of the tariff, they aren't producing or selling as much of  their semiconductors in the market as they once were. So what happens? So  this shifts to the right, right? So now domestic production shifts to the right. Now  we have greater domestic production. If you'll notice how we were here initially,  okay, and we were only capturing this margin for domestic production with the  tariff, our price point changes, so therefore it allows our domestic producers to  now produce more and become more competitive in the market. But what  happens to the demand of these semiconductors with the tariff? Right, the  demand also shrinks. Right, so as the price goes up, consumers aren't willing to  buy as many, right? But even though they're not, even though we're not going to  sell as many semiconductors as we would have at the original world price, right? Our domestic producers are going to be more competitive in our domestic  market, right? So we're kind of using this as a protection tool for our domestic  producers, right? So, so the price went up, our foreign or our domestic  production increased, right? And our domestic consumption also decreased,  right? Relative to the change in price with the tariff, right? So as our price goes 

up, consumption or demand for this product will go down, and then production  will go up. Right, so so our consumption will go down as prices rise, and  production will go up as prices rise. Right, so so this area here is known as the  tariff revenue, the marginal revenue that our firms or our producers of  semiconductors will receive because of the tariff. So the net welfare cost of  protectionism, right? A tariff has two effects that influence welfare. First,  domestic consumption as we showed, domestic consumption will decrease.  Right as they, as the impact of the tariff takes hold and prices rise. Right, the  consumption of those products will decrease because people aren't willing to  pay the higher price. Therefore, on the flip side, domestic production will  increase because now producers can see that they can make a greater profit or  increase their revenue because of the increasing prices. So they'll ramp up their  sales or their production and sell more products. Hopefully, right. So both of  these effects reduce welfare, right? Domestic consumption is down. They lost  gains from trade, right? So, but domestic production is up. So, wasted resources occur from higher production costs, right? So, this is what we want to talk about  next, right? We want to talk about the wasted resources that are incurred as  production ramps up, but prices go down, right? Because there's not as many  consumers willing to buy the product at the at the more expensive price, but  producers want to produce more at higher prices. So therefore, we will see that  this will result in wasted resources from higher costs of production, right? So this is what I want to illustrate right now, right? So now we see our world price here  at $9 Okay. Now we implement our tariff, right? So this is a 110% tariff here from nine to 20. Okay, so this is a pretty big tariff. So now we have a big spread, right, from nine to 20. So, so as you can see, equilibrium is here, right? What  remember, equilibrium is where supply equals demand, or the point at which the supply and demand curve intersect on these graphs, right? So this is equilibrium now. Right, so in the meantime, as we are producing, as we are producing and  selling at nine, right? Obviously, the demand at $9 right, is outside on the curve  here. It grows greater, right, but the supply goes down as prices go down, right?  But as prices go down, consumption or demand increases, right? So as prices  go down, the supply decreases. But as as prices go down, demand increases,  right? So we can see that prices go down. When prices go down, supply  decreases, right? There's not as many producers willing to produce at the lower  price, right? But because the price is lower, there are more people in the market  demanding that product. But we are outside of equilibrium at the world supply.  Okay, so because we are producing, right? Because we are producing below, or  we, or let's say we are selling at this point, at any point here, right? We are  selling below the world price, right? And we are selling as many, we are selling  as many goods as we can because the production costs are are lower, right?  And and we we we are wasting these resources as we are producing more at  lower prices, right? So we are we are not optimizing. So we are creating a deficit

here with our resources. We are wasting resources because we are not in  equilibrium. We are not equal to demand and supply. So therefore, anything  below this curve is wasted. Right. So now we'll also have losses from. This is a  dead weight loss. Right. A dead weight loss is something that we because of a  tariff or any kind of protectionist measure, we are going to incur some dead  weight loss, right? This is revenue that can't be captured, that'll never be  captured because the prices increase, right? And therefore, we cannot catch up  with the cost of production. So therefore, we'll be paying more costs of  production as the prices go up, so this will create a deadweight loss. So this can be calculated very easily, right? So if we put some monetary value on it, okay.  So so we just take you know 0.20 minus 0.09, right? 0.11 times 20, right?  Divided by two. Right, so we're going to divide by two again because this is a  triangle. Right, so that we're just solving for a triangle. Right, we're solving for  the value of a triangle. Essentially, that's all we're doing. So the value of the  wasted resources because of the tariff is 1.1 billion. It's an easy equation and it's very simple to solve. Right, it's just simple mathematics. Loss gains from trade.  Now we can calculate our deadweight loss, which is very similar, right? But it's a very simple calculation, and you can see that because of these protectionist  measures, there are some lost resources, there are some wasted resources,  there are some opportunities that are lost to maximize profits, but at the same  time, you can see the value of the protectionist measures because they will  really insulate the domestic producers and the domestic economy from the  international community that is trying to import their products, therefore driving  down the price and putting domestic producers out of business. So a lot of  times, governments will introduce protection protectionist measures so they can  protect their local domestic producers. So tariffs increase prices to consumers,  so domestic consumption falls, and it creates a dead weight loss, right? So  tariffs increase the price, right? So consumption falls. So therefore, as the price  goes up, right, demand is weakened, right? So this creates a dead weight loss  by the tariff because it moves the price up and consumers and as we noticed in  this example, right, that the tariff was 110% increase. So therefore,  consumption-that's a dramatic increase in price. So consumption falls right  away, right? So it's not a gradual-it's not a gradual price point or price discovery,  right? It's not-it's not gradual up this curve. Right, it's one day the price is $9 The government comes in, puts down a tariff. The next day it is $20 Right, so we're  calculating that dead weight loss, right, from the tariff. So it's not like we're  gradually moving up this supply line, right? We're not gradually moving up the  supply curve, right? So it's one day the price is nine, the next day the price is 20. Demand is going to decrease, right? So therefore, we create this dead weight  loss through the tariff because now companies cannot realize the profit marginal benefit, right? You cannot. Cannot capture this profit. You cannot capture this  revenue, right? In this pink triangle, known as a dead weight loss, because on 

day one the price is nine. On day two, the price is 20, and there's no way to slide up the scale to capture these revenues. So that was known as a dead weight  loss. So now let's say we have all of this inventory out in the market, right? And  and now because the price is 20, right, and went from nine to 20. Now because  we have all this excess surplus inventory, because if you've noticed demand has really shrunk, right? Demand has really had some downward pressure on it,  right? All of this inventory out in the market that is no longer going to be  demanded will be seen as wasted resources because this inventory is going to  sit on the shelves. Who knows what's going to happen? How long it's going to  take to sell it? So, because of the tariff, we have now incurred wasted resources, and firms cannot capture the marginal revenue because of the tariff, right? So  now we'll have losses from trade, and then we'll have wasted resources. So it's  a balancing act, right? It's really tough to to put these tariffs on, right? It  sometimes can create a lot of geopolitical friction between governments, but a  lot of times in in the U.S. particularly, we will slap on tariffs to really protect our  domestic producers. Tariffs divert production from low cost, which is the world,  right? It's low cost because if we're importing from the world, there's a ton of  supply, right? So therefore, because the supply is so large, it's going to put  downward pressure on price. Producers so divert production from low-cost  producers to high-cost producers, right? So now we're swinging, like we saw  here, right? We saw here how whenever we begin to import, right, our domestic  production got cramped right. So so here is our domestic production right. We're here. We are capturing all of this right, but now because of the tariff, our  domestic production really gets squeezed right. So we are putting the tariffs in  place to divert production from the low cost or the world supply, right, to our high cost domestic producers. So we're kind of swinging the pendulum back in favor  of the domestic producers. So distributions of losses and gains are okay. Look,  this is bad for consumers, right? We slap on a tariff. We use our protectionist  measures. It's going to push prices up. Okay, it's not good for consumers, but it's good for our producers. Right? It's good for our domestic producers. Overall,  tariffs are bad for international trade, as it will really dampen the consumers, and it and it and it won't allow the majority of the world population to possibly enjoy  the benefits of global free trade, but there are local governments that really want to protect their their high cost producers so that their domestic economies aren't  really hurt or or they may put them into some type of recession, or something  like that, or spike unemployment, things like that. If we're really bringing in a lot  of imports, so this is it's a very it's a it's a very delicate balance between  international firms that trade you know internationally and globally. So, yeah,  governments have to really be careful on how they introduce their protectionist  measures.