In response to the United States’ steel and aluminum tariffs set forth by the current administration’s trade team, Japan is reacting with tariffs on beef imports from the United States and other countries. What is interesting here is that these “other countries” haven’t done anything to provoke Japan. This can mean several things. First off, it proves how important Japan sees its relationship to the United States because it seems as if their leadership did not want to single them out. Second, the biggest reaction (albeit quieter) this move may get is from China, not Japan. China and Japan are currently in a territory dispute over the sea between the countries. This water region is very important, because many goods pass through here in trade between numerous Asian countries.
There are several ways to look into this strategy, but the best, most analytic way is to use game theory.
More specifically, the tit-for-tat game. This is a very straightforward strategy in which Japan seems to be taking. As one can see in the diagram above, the country that is engaging in this strategy never cheats first and plays nice. However, when another country starts “cheating,” or in this case puts up trade barriers such as tariffs, the country not “cheating” will begin to retaliate. This cycle will repeat until the country initiating the tariff puts an end to it. Consequently, if this goes on and on, a trade war may break out between the two countries; in the long-run, this would hurt both countries since trade wars are not a zero-sum game. In other words, neither country will 100% win and neither will 100% lost. In fact, the entire idea of globalization and multilateral trade deals is to reject the entire idea of a zero-sum game and have countries work together by yielding their competitive advantage.
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Will this hurt the United States? Of course it will. But what may be even worse is that other countries, seeing a potential conflict between the United States and Japan, may try and take advantage of the two countries and play them off one another. China is in an especially good position to do this because of its overall presence in Asia. However, one specific reason why this may not deal as much of a blow to the United States as many have predicted is that McDonald’s is beginning to transition to fresh beef here in the United States. This signals an overall change to the way McDonald’s operates and one can expect this change to happen worldwide. Still, this would be a blow to the United States’, but the question one needs to ask is if the U.S.’ steel and aluminum tariffs will offset Japan’s tariff hike on frozen beef imports.
One of the reasons President Trump cites in defense of these tariffs is for national defense. The theory is that since the military uses a lot of steel and aluminum to make ships and planes, the materials need to be made in the United States. A lot of economists, such as Paul Krugman and Greg Ip, call this reasoning rubbish. Still, this is not the only reasoning that the President uses to defend his tariffs, as he wants more manufacturing jobs to come back to the United States.
If we look at the chart above, it shows what happens when a tariff is put in place. Essentially, the consumers are bearing the brunt of the consequences, as the tariff causes domestic prices to increase while limiting the volume of imports. In theory, since P* is increasing to P’, domestic companies will be more willing to product the good.
Lastly, let’s look at the AD/AS model below. The main takeaway from this chart is that the aggregate and aggregate demand change in response to the tariff, which raises the price of imported goods. This actually causes a price increase which leads to a deadweight loss of the area B+C. This deadweight loss is felt by the consumers who need to pay a higher price on goods such as cars. However, the producers are greatly helped by a tariff, as all of area A is seen as a gain for the producers. Countries such as China have actually been putting on a tax of imported goods from other countries, so it was only a matter of time for other countries to start hitting back. The world seems to be becoming less of a free trade market and a bit more protectionist. With Brexit and other populist movements in Europe as well as the election of a populist U.S. president, it makes sense that the world will see an increase in tariffs and, perhaps, quotas in the future. What is intriguing about this is that there is still a free trade part of Europe that still advocates for open borders and the free flow of goods. This may cause new sides in geopolitical structures to emerge, with the two most prominent sides being advocates for either protectionist policies or free trade policies.
