One Benefit of Tariffs
By Pierre Lemieux
Perhaps one benefit of President Trump’s tariffs and trade war will be to illustrate standard results of trade theory.
One general result is that a domestic tariff against imports also increases the domestic price charged by domestic producers of the protected good. There is only one price in the market for a given good (quality being constant). Domestic producers will get the same higher price that foreign producers charge tariff-included on the domestic market. I gave an example of steel prices as reported by the Wall Street Journal in my post “A Simple Illustration of Standard Trade Theory,” July 3, 2018.
On Wednesday, the Journal gave another example, this time on aluminum prices:
Aluminum prices in the U.S. have climbed this year after the Trump administration imposed a 10% tariff on imported aluminum in March.
Although we still don’t have much data, Pittsburgh-based Alcoa is reported, for the third quarter, to have
had a net benefit of $27 million from the tariff as a result of higher prices on aluminum it produced in the U.S. Alcoa said its overall price for raw aluminum sold in the quarter rose by 10% a ton.
This is why protected domestic companies usually love a tariff. For Alcoa, though, the result is more ambiguous as the company imports part of its aluminum from its foreign smelters, especially in Canada, and these imports were hit by the tariff. As the Journal says, this “has limited [the company’s] ability to benefit from the tariffs.”