In the article below by Chris Isidore, it talks about how Mexico imposed a valued $3 billion in tariffs on US exported goods, such as bourbon, different types of cheese, pork, apples, potatoes, and a variety of steel products. These tariffs cost between 15% and 25%, which could increase the prices of US exports by the percent they will have to pay in tariffs (Isidore). For simplicity purposes, I chose to model just the tariffs on apples that Mexico imposed on the US.
If the Mexican government decides to impose a tariff of around 15-25% on imported apples from the US, that will cause S(world) to shift up to S(world) + tariff. Now the price of apples is at Pw + T. Further, since there is a price increase, quantity demanded falls from Q2 to Q4 (people don’t want to pay such high prices). This prompts domestic producers in Mexico to increase the production of apples to Q3 from Q1, which makes it so their revenue increases to g + a + b + c + h from just g. The rest of the apples are produced by the US from Q3Q4, which changed originally from Q1Q2. Now the revenue of the US producers falls to only i + j, instead of h + i + j + k. They also have to pay the government the tariff cost of d + e. Moreover, f is a loss of consumer surplus.
As one can see, the domestic Mexican producers benefit from the tariffs, as their apples will be more competitive to the apples of the foreign US producers since they will likely be cheaper. The domestic producers will also increase their supply of apples, and then make more revenue. The foreign US producers are negatively affected, as they are forced to pay tariff costs, which decreases their revenue. Domestic consumers are affected because they will buy cheaper domestically produced apples than if they were to buy foreignly produced apples. The Mexican government benefits from the tariffs because they acquire the money from the tariffs paid by the US. Lastly, there is poor world efficiency in the production of apples because more world resources are being used to produce apples than are needed. This is because Mexican producers need a minimum revenue of h + c to produce apples from Q1Q3, while more efficient foreign US producers could do so for a minimum revenue of only h.
It is possible that the government of Mexico wants to use protectionist policies on apples to prevent "dumping" of US-produced apples onto Mexico. It has been reported that the US has dumped agricultural goods on Mexico, which caused Mexican farmers to lose around $1 billion per year for a period of time (Wise). So, in order to protect the Mexican farmers from losing money again to cheaper US exports, the Mexican government likely wanted to impose tariffs on agricultural goods like apples exported by the US. This way Mexican farmers would be able to sell apples for a cheaper price than the US.
Work Cited
Isidore, Chris. “Tariffs: Mexico Hits US Exports with $3 Billion in Levies.” CNNMoney, Cable News Network, https://money.cnn.com/2018/06/06/news/economy/mexico-us-tariffs-retaliation/index.html.
Wise, Timothy A. “Mexico: The Cost of U.S. Dumping.” NACLA, https://nacla.org/news/mexico-cost-us-dumping.
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