As a recent move in the US-China back-and-forth trade war threat, the Trump admi

Question

As a recent move in the US-China back-and-forth trade war threat, the Trump administration on June 15 announced a 25% tarrifs on $34 billion Chinese goods; barely 24 hours later, China threw out retaliatory tariffs “of equal scale and equal strength” on US goods including soybeans. Both parties are considering putting tarrifs on another $16 billion goods. These tarrifs are ultimately paid by consumers, but won’t be effective until July 6, which means there is still room for them to retreat from a potential trade war. 1. Effects on Soybean Farmers: Perfect Competition. Suppose you are a lobbyist economist hired by the American Soybean Association who represents over 300, 000 U.S. soybean farmers. You need to present to the President your analysis of the impact of this trade tention on the US soybean farmers and persuade him to repeal his trade policy . You know that the US soybean farmers mostly produce in small-scale family farms so that the soybean market is perfectly competitive.

Suppose the Chinese demand(in million metric ton, or MMT) for US soybeans is captured by the following demand curve QC = 60 - 0.05P

the domestic demand curve for soybeans is QD = 50 - 0.02P

the demand curve for US soybeans in the rest of the world(excluding US and China) is QR = 40 - 0.08P

The US industrial supply curve of soybean production is MC = 300 + 0.625Q (1) where unit of P and MC is metric ton

(a) What’s the total demand curve facing the US soybean industry before China imposes tariffs on US soybeans?

(b) What’s the total demand curve facing the US soybean industry if China were to impose 25% tarrifs on US soybean imports?

(c) How would this tarrif affect the price of US soybeans in the world market? By what percentage would US soybean farmers have to cut their production?

(d) By what percentage would this tariffs reduce the revenue of the US soybean industry? (e) If President Trump insisted his trade policy and still wanted to retain the political support from the “Soybean Belt” by giving direct subsidies to the soybean farmers to completely compensate for their loss, how much would it cost the tax-payers? (Hint: calculate the loss of producer surplus)

Explanation / Answer

a) Before tarriff gets imposed the total demand faced by US soybean farmers is summation of domestic demand, chinese demand and demand from rest of world.

Demand = QC+ QD+QR

Q = 60 - 0.05P + 50 - 0.02P + 40 - 0.08P

Q = 150 - 0.15P

b) If China impose tarriff then demand from china will change as follows :

QC = 60 - 0.05(1.25P)

Now Total Demand: Q = 60 - 0.0625P + 50 - 0.02P + 40 - 0.08P = 150 - 0.1625P

or P = 923.07 - Q/0.1625 .... eq 1

c) After tarriff:

MC = 300 + 0.625Q

and MR = dTR/dQ = d(P*Q)/dQ = d(923.0Q7 - Q2/0.1625)/dQ see eq i

MR = 923.07 - 12.307Q

Put MR = MC

923.07 - 12.307Q = 300 + 0.625Q

Q = 32.79

And Before Tarriff Q = Q = 150 - 0.15P or P =1000 - Q/0.15

MR = 1000 - 13.33Q

Now MR = MC

1000 - 13.33Q = 300 + 0.625Q

Q = 50.161

You can see that the demand has decreased because of tarriff from around 50 tons to around 33 tons. Thus the ssuppliers will now redeuce their production and supply ofsoybeans by 50-33 = 17 tons approx. or 33/50 * 100 = 66%

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