Consider Donald Trump chooses to raise import tariffs on Chinese Goods, what will be the impact on the US macroeconomic environment?

Firstly, it would be useful to look at some key definitions. An import tariff is a fee paid to bring goods from abroad into a country and be sold. Therefore, a rise in Chinese import tariffs raises the prices of goods that originate in China. Secondly, the notion of Aggregate Demand – made up of Consumption, Investment, Government Spending, Imports and Exports – makes up the total spending in the economy and is defined by the equation AD = C + I + G + (X-M).
Now, analysing the situation in the Short-term, firstly, looking at Consumption, a rise in the price of Imported goods from China (making up 17% of imported goods) will lower consumption as goods become more expensive. Secondly, inflation will rise in the short-term because of the rise in the price of goods imported from China, and, in evaluation, the effect is likely to be relatively significant as Chinese imports make up a large percentage of US imports. The rise in import tariffs has no direct impact on Government Spending, however in the Long-Run, domestic production of goods may require some stimulus and therefore may prompt some US fiscal spending. The effect on the Current Account (Exports minus Imports [X-M]) will be the largest of the components of Aggregate Demand. In the short-term, Imports will decrease due to the higher tariffs lowering the volume of imports into the US (which is positive for the current account). However, in the longer run, the Chinese government may raise their own tariffs of US imports into China. Therefore, in the longer run this may lower US Exports and will therefore worsen the current account.

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Answered by Hugh W. Economics tutor

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