“president Donald Trump Imposes 30% Tariffs On Solar Panels”

This article is about President Trump imposing a 30% tariff on imported solar panels. Tariffs are taxes on imported goods they are the most common form of trade protection. Trade protection is government intervention in international trade through the imposition of trade restrictions or barriers to prevent the free entry of imports into a country and protect the domestic economy from foreign competition. The effects of the tariff can be shown by the following diagrams:

The tariff increases the prices of imports from the world price P1 to P2 (world price with the tariff). This generates government revenue as shown in the box in the center of the diagram and there is an anticipation of higher costs for consumers. The quantity domestically supplied increases from Q1 to Q3 and Q2 to Q4. The quantity demanded decreases domestically. Consumers used to purchase the quantity of 0 to Q2 and now they will purchase from 0 to Q4. The quantity of imports will shrink from the original Q1 to Q2 and become from Q3 to Q4, decreasing foreign producer revenue.

There are various advantages for the United States to impose this tariff. First of all, the current account deficit will decrease. Aggregate demand will slightly increase domestically (importance of solar panel industry below) because net exports will increase as imports decrease. It will somewhat help decrease America s enormous budget deficit with the revenue made from the tariff. Trump s idea is to level the playing field for those who manufacture the parts domestically, to protect domestic producers and infant industries from foreign competition. In theory this action will increase employment in the solar panel manufacturing sectors of the economy, but many other jobs will be lost (explained later in the commentary), therefore it might not decrease domestic unemployment. For Trump personally this action might help him politically in gaining popularity, as he wants to show he s tough on trade to please his supporters as a strong protector of American businesses.

There are also various disadvantages for America of imposing a solar panel tariff. This action will increase the price level (as seen in the increase from PL1 to PL2 in the second diagram) and lead to unwanted inflation (also due to the importance of the industry and the AS decrease described below). This will lead to an efficiency loss, as resources are misallocated. The world output will decrease and might impede technological advancements: specially making renewable energy more affordable for environmental reasons. This will also have a negative effect on consumers. Consumer surplus experiences a loss, less is consumed at a higher price.

This tariff will also have an effect on aggregate supply (AS) as shown in the second diagram. As solar power generated 58.9 terawatt-hours, 1.44% of total US electricity ( EIA - Electricity Data ), this tariff will have a negative effect on short term domestic output. If AD will increase more or SRAS will decrease more is unknown, therefore the effect on income is unknown. It is likely that SRAS will decrease more than AD increases, because the effect on energy and production seems greater than the effect on the overall of imports.

In the short run, the tariff will decrease domestic unemployment (as mentioned before). In the long run, the tariff will increase domestic unemployment, as the article mentions, tens of thousands of job losses in a sector that employed 260,000. Many firms rely on solar energy and the increase of energy prices will cause companies to lay off employees. Another risk of this policy is the danger of retaliation, there is great probability this policy might initiate a trade war or produce international tension to say the least. This can bring economic sanctions from the WTO, or if the violation is not resolved China and South Korea could potentially retaliate with tariffs on American goods. Tariffs are not feasible as a long term solution, as total welfare experiences a loss and efficiency decreases around the world. If President Trump s objective is to protect local businesses and reduce domestic unemployment he should not impose tariffs, as tariffs increase cost of production due to lack of competition and lead to allocative inefficiency, and unemployment might increase and not decrease. In theory, President Trump should allow free trade for more American producers to acquire needed resources to supply. Consequently, the firms will not lay off American workers. In practice, President Trump might not restore free trade due to the popularity of protectionism.

Works cited

"EIA - Electricity Data". Eia.Gov, 2018, https://www.eia.gov/electricity/monthly/epm_table_grapher.php?t=epmt_1_1_a. Accessed 13 Sept 2018.

Tragakes, Ellie. Economics for the IB Diploma. Cambridge University Press, 2012.

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