International Trade, Globalisation and Exchange Rates: Question 3

Worked solution

Part (a): Price after the tariff

A specific tariff adds a fixed amount to the price of each imported unit. Sarnovian exporters keep their own price unchanged, so the tariff is added on top of the original $40 price:

$40 + 6 = 46$

The price paid by Northmere’s importers is $\boxed{46}$, i.e. $46 per unit.

Part (b): Effect on domestic sales

Before the tariff:

• Sarnovian import price: $40
• Northmere domestic price: $44

The import was cheaper, so buyers had a price incentive to choose the Sarnovian steel piping over the domestic product.

After the tariff:

• Sarnovian import price: $46
• Northmere domestic price: still $44

The import is now more expensive than the domestic product. Buyers who previously chose the cheaper import now have a price incentive to switch to Northmere’s own steel piping instead, since $44 is now the cheaper option. The tariff is therefore likely to increase the quantity of steel piping sold by Northmere’s domestic producers, as demand shifts away from the now-costlier import.

Part (c): Reasons for the trade restriction

Beyond simply making Sarnovian imports more expensive, a government might impose a tariff such as this one to:

• protect a strategic industry. Steel piping may be considered important for national infrastructure or security, so the government wants to keep domestic production capacity in place rather than let it be replaced by imports; and/or
• raise tax revenue. Every unit imported from Sarnovia now generates $6 of tariff revenue for the Northmere government, which can be used to fund public spending.

(Other syllabus reasons would also be acceptable here, such as protecting an infant or declining industry, reducing a current account deficit, or avoiding dumping.)

Part (d): A disadvantage of the tariff

Although the tariff protects Northmere’s domestic steel-pipe producers, it raises the price of steel piping in Northmere from $40 to $46. Firms that use steel piping as an input (for example, construction companies building pipelines or infrastructure) now face higher costs, which they are likely to pass on as higher prices for their own goods and services. Consumers who buy steel piping directly also lose out, paying $6 more per unit than before. The tariff therefore raises costs across parts of Northmere’s economy, even as it protects one domestic industry.

Final answers

• (a) Price after tariff $= \boxed{46}$, i.e. $46 per unit.
• (b) Quantity of domestic steel piping sold is likely to increase, since the import ($46) becomes more expensive than the domestic product ($44).
• (c) E.g. protecting a strategic industry and raising tax revenue for the government.
• (d) Higher costs for firms using steel piping as an input (and for direct buyers), likely passed on as higher prices elsewhere in Northmere’s economy.