For the following problems, assume that under free trade (i.e., before any tariffs are imposed):
- The U.S. has a domestic shoe industry, but also imports shoes from the rest of the world.
- The components used to make shoes (e.g. leather and rubber) are produced both domestically and imported from the rest of the world. But these components are produced by firms outside the U.S. shoe industry.
- In both the U.S. and in the rest of the world, the cost of producing shoes (and their initial price) is $50 per pair.
- In the U.S., each pair of shoes uses $20 worth of "outside" components (i.e., produced in the U.S. or abroad, but not by the U.S. shoe industry.)
Also assume that after any tariffs are imposed, the U.S. shoe industry continues to use the same quantity of components per pair of shoes as before.
For the first 6 questions, assume the U.S. is a small country in the markets for shoes and imported components.
1. Before any tariffs, what is the U.S. shoe industry's value added for each pair of shoes?
2. If the U.S. imposes a 20% tariff on imported shoes and no other tariffs, what price will people pay for shoes in the U.S.?
3. If the U.S. imposes a 20% tariff on imported shoes and no other tariffs, what is the U.S. shoe industry's value added?
4. After the 20% tariff on imported shoes, what is the effective rate of tariff protection (ERTP) for the U.S. shoe industry?
5. Now, suppose that-in addition to the 20% tariff on imported shoes-the U.S. also imposes a 10% tariff on the imported components used by the shoe industry. What is the effective rate of tariff protection (ERTP) for the U.S. shoe industry now?
6. Now, suppose that-in addition to the 20% tariff on imported shoes-the U.S. also a 30% tariff on the imported components used by the shoe industry. What is the effective rate of tariff protection (ERTP) for the U.S. shoe industry now?
Now suppose the U.S. is a large country in the market for shoes and imported components. Assume that any tariffs (on shoes or imported components) causes their price in the ROW to fall by 5% from what they were before the tariff. [Note: This is an arbitrary assumption. In reality, how much the price falls in the ROW would depend on the particular supply and demand curves in the U.S. and the ROW.]
7. If the U.S. imposes a 20% tariff (per pair) on imported shoes and no other tariffs, what will be the price of a pair of shoes in the ROW? What will be the price of a pair of shoes in the U.S.?
[Hint: Be careful here. If the price of shoes falls by 5% from the pre-tariff price, you might think that the price must rise by "the remaining 15%" in the U.S.. But do the math, and you'll see that would result in the U.S. price ending up more than 20% higher than the ROW price. That can't be when a 20% tariff is imposed on the ROW price. So you once you find where the ROW price ends up, you can find the U.S. price by making it 20% higher than that ROW price.]
8. If the U.S. imposes a 20% tariff (per pair) on imported shoes and no other tariffs, what is the U.S. shoe industry's value added for each pair of shoes?
9. After the 20% tariff (per pair) on imported shoes, what is the effective rate of tariff protection (ERTP) for the U.S. shoe industry?
10. Now, suppose that-in addition to the 20% tariff (per pair) on imported shoes-the U.S. also imposes a 10% tariff on the imported components used by the shoe industry to make each pair of shoes. What is the effective rate of tariff protection (ERTP) for the U.S. shoe industry now?