Economics – Globalisation | e-Consult

Answer:

Potential Benefits:

• Protection of Domestic Producers: The tariff makes imported steel more expensive, increasing the price competitiveness of domestically produced steel. This can lead to higher domestic output, employment, and profits for steel producers.
• National Security: A domestic steel industry can be considered strategically important for national security, particularly in sectors like defence. A tariff can ensure a reliable supply of steel for these sectors.
• Infant Industry Argument: If the domestic steel industry is new and unestablished, a tariff can provide it with the time and protection it needs to grow and become competitive internationally.

Potential Costs:

• Higher Prices for Consumers: The tariff increases the price of steel for consumers and businesses that use steel in their products. This can reduce consumer purchasing power and increase production costs for firms.
• Reduced Consumer Choice: The tariff limits the availability of cheaper steel from other countries, reducing consumer choice.
• Retaliation: Other countries may retaliate by imposing tariffs on the UK's exports, harming UK exporters and potentially leading to a trade war.
• Inefficiency: The tariff protects inefficient domestic producers from competition, leading to allocative inefficiency and a misallocation of resources.

Conclusion: The policy of imposing a tariff on steel imports has both potential benefits and costs. While it can protect domestic producers and enhance national security, it also leads to higher prices for consumers, reduced choice, and the risk of retaliation. The overall welfare impact is likely to be negative, particularly in the long run, due to the inefficiencies it creates.