The Tactical Economist

Introduction

Nations are interdependent on each other for economic stability since trade policies in one country often affect industries in another. This is why many countries aim to protect trade through agreements. For example, the United States (U.S.) and South Korea are a part of the U.S.-Korea Free Trade Agreement (FTA). This allows the two countries to be able to freely trade most goods without the worry of tariffs while still being able to impose separate trade restrictions on non-member countries (trading bloc). However, recently the U.S seeks to impose a 25% tariff on steel and aluminum imports, which would hinder many industries worldwide, including South Korea. In response, South Korea's Industry Minister, Ahn Duk-geun, is actively seeking an exemption from the proposed U.S. tariffs to maintain the mutual interdependence.

International trade consists of the exchange of goods and services that involves exports and imports. Policies like the previously mentioned U.S.-Korea FTA is a part of economic integration, which refers to the process of countries being more interdependent and economically unified. This enables firms from both nations to operate efficiently.

Analysis

Before the imposition of a tariff, the steel and aluminum markets operate in a free market equilibrium, where the domestic demand meets domestic supply. This also indicates the price equilibrium equals quantity equilibrium. However, because of increased competition, the price and supply the world market offers for the goods is much lower as to incentivize consumers to purchase the imported product. This is also why consumer surplus takes up a large portion as opposed to producer surplus. Here, the consumer mostly benefits from the low prices. Moreover, foreign nations benefit more from trade since foreign revenue becomes much more when compared to domestic revenue. Lastly, gains from trade (GFT), or net benefits to that entities experience as a result of trade, finds itself taking away from consumer surplus and foreign revenue.

Trade barriers, such as tariffs, are a form of protectionism that governments implement to restrict international trade. This in turn protects domestic industries from excessive foreign trade and competition. While these measures can safeguard local businesses from external pressures, they often lead to inefficiencies that disrupt interdependence. A tariff is a specific tax imposed on imported goods or services. In this case, the United States decided to place a 25% tariff on steel and aluminum.

Once the tariff is placed upon trade, multiple changes occur. First and foremost the supply and price level that corresponds with the rest of the wrold raises to that of supply/price "+ tariff." This is done to ensure that foreign goods (South Korean goods) are offered at a higher price, encouraging customers to buy domestic products. The quantity supplied domestically and the quantity demanded domestically decrease as depicted by the change of imports to imports. Furthermore, consumer surplus decreases while producer surplus increases, indicating that consumers don't benefit as much from the imposition of tariffs. Foreign recenye also decreases while domestic revenue expands. GFT continues to overlap consumer surplus but decreases. Finally, a new section is created, government revenue, which are funds that go directly to the government. Nevertheless, this creates deadweight loss (DWL): a loss of consumer surplus

Conclusion

Ultimately, there are multiple advantages that are wrought by tariffs. The entities that benefit most by the tariffs would be domestic producers, since consumers would seek out their products over foreign goods as previously mentioned. It also helps stimulate domestic production and investment in local firms. But it also generates revenue for the government which is derived from the tariff collections.

Yet, there are various disadvantages that accompany tariffs. For example, if the tariffs were to be imposed, it would not only affect South Korea's economy, but also U.S. industries that rely on their imports, such as automobile and construction firms. Tariffs also create economic inefficiency as seen by the deadweight loss generated. It can also strain economic relations, and opens the possibility of South Korea or other nations implementing countermeasures. This further disrupts trade and therefore further disrupts interdependence. Moreover, there are numerous benefits that result from free trade. Apart from increased completion and lowering of prices, it also incentivizes production from firms to compete on non-price factors (such as quality), which allows domestic firms to source cheaper and better quality materials for production. There are also lower opportunity costs due to efficient resource allocation. Lastly, increased output enables firms to achieve lower average costs of production. Those cost savings can therefore be passed onto the consumer. If the U.S. government refuses to offer South Korea the exemption they seek, both countries would be at risk of suffering economic consequences.