A recent headline reads "Trump tariffs send China nuts about Australian almonds" - Financial Review, 8/13/2018. This article provides the following details:

• China, which accounts for 80 per cent of the global market, imposed a 25 per cent tariff on American almonds.

• US produces about 80 per cent of global supply of almonds.

• Australian exports currently represent a negligible share of the Chinese market.

• The Chinese tariff on Australian almonds is low (assume it is zero).

We’re interested in providing an analysis of this market to understand the impact of the tariff. Since we only have partial information about the demand and supply conditions we’ll need to make some judicious assumptions. Our first set of assumptions describe the demand and supply conditions for the Chinese almond market before the tariff. As a general rule of thumb try to make the simplest assumptions necessary to de- scribe the basic market setting. Since we don’t know anything about the characteristics of the initial equilibrium we’ll assume a setting that is "neutral". In particular, assume that the Chinese market is only supplied by US almond producers. In this case:

Qdc = 40−p

Qsus = p

#1. Using these equations solve for the initial pre-tariff equilibrium. Calculate consumer surplus and producer surplus. Represent this information in a graph of the Chinese almond market.

#2. Calculate the point elasticity of supply and demand at the initial equilibrium. Explain the sense in which this initial equilibrium is neutral with respect to the burden of a tax.

Assume that the Chinese 25% tariff on US production translations to a per unit tariff of $5.

#3. Solve for the new equilibrium after the tariff is imposed. What is the incidence of the tax on both sides of the market? Calculate consumer surplus, producer surplus and tariff revenue. What are the consequences of the tariff for Chinese welfare and US welfare in the almond market? Explain the change in Chinese welfare. What happens to total welfare in the almond market. Depict this information in a graph of the Chinese almond market. On the graph identify the dead weight loss and explain why it arises. [

Our initial analysis didn’t include Australian exporters, so we’ll now include them. When no tariff is applied Australian almond growers have a marginal cost that is slightly too high to export to China. To capture this situation, once again we’ll follow the rule of thumb of simplicity which suggests QsAus = p − 20.

#4. On a graph construct the world supply curve (i.e. US and Australian growers) before the tariff. What is the new equilibrium?

#5. On a graph construct the world supply curve (i.e. US and Australian growers) with the tariff. Depict the new equilibrium in a graph of the Chinese almond market.

#6. On a graph identify consumer surplus, US producer surplus, Australian producer surplus and tariff revenue when the tariff is imposed. Does the tariff result in a large gain for Australian almond exporters?