Tariffs and Efficiency: Evaluating the U.S. Response to Chinese Aluminum Dumping

China's recent aluminum dumping, the practice of selling goods in foreign markets below

production costs, has led to significant inefficiencies by distorting competition and oversaturating global supply. In response, countries such as the U.S. and Canada have imposed tariffs, government -imposed taxes on imports, to protect domestic industries and stabilize markets. The United States has proposed tariffs reaching 25% on Chinese aluminum. These measures aim to correct market imbalances and restore competitiveness; however, they can disrupt efficiency by increasing input costs for industries reliant on aluminum, such as construction and automotive. This topic can be explained clearly and effectively through a diagram.

Dumping, as demonstrated on the graph, occurs when Chinese aluminum enters the US market at 𝑃r, a price significantly below the world price 𝑃w. This artificially low price arises from excess supply in China, often supported by government subsidies, enabling producers to undercut U.S. domestic manufacturers. At 𝑃r, U.S. domestic production contracts to 𝑄𝑟, as domesic firms cannot compete with the lower prices. Imports surge, covering the gap from 𝑄𝑟 to 𝑄2, increasing reliance on foreign aluminum and displacing local producers.

The short-term impact is harmful to U.S. producers, because of lowered revenue due to more competitive aluminum from China. Unable to compete, firms may reduce production or shut down, leading to structural unemployment as workers lose jobs in the aluminum industry. In the long run, this erodes the domestic industry's capacity as production capabilities decline and skilled labor is displaced. Furthermore, heavy reliance on foreign imports increases economic vulnerability, particularly during trade wars. Allocative and productive efficiency are also endangered. Although the market at 𝑃r benefits from cheaper aluminum in the short term, this price does not reflect the true cost of production. The artificially low price distorts competition, as efficient U.S. producers are driven out by less efficient but subsidized foreign firms.

The introduction of a tariff addresses the issue of dumping by artificially raising the price of Chinese aluminum in the U.S. market. As shown on the graph, the price increases from 𝑃𝑟 to P𝑡 reducing the volume of imports while incentivizing domestic production. Domestic output

expands from to 𝑄𝑟 to 𝑄3, enabling producers to regain lost market share and stabilize employment within the industry. Imports shrink to the range between and 𝑄3 and 𝑄4, as foreign suppliers lose competitiveness under the higher price conditions. While the tariff restores competitiveness for U.S. producers, it introduces inefficiencies. The introduction of tariffs allowed ineffective domestic producers to produce between 𝑄3− 𝑄1. Productive efficiency decreased because domestic manufacturers were allowed to produce the

same amount of aluminium at a lower cost due to the increase in price to 𝑃t, enabling them to

be less efficient and yet still compete in the market. If the price of aluminium rises, businesses that use it, like vehicle manufacturers, will have to pay more for the aluminium, which will result in a loss of efficiency and welfare (area d+f). The welfare loss illustrates less efficient domestic production (area d) and consumers who are willing to buy aluminium but cannot afford to do so (area f).

Tarrif also increased producer surplus from m to m+g as they are able to supply more at a higher price, and decreased consumer surplus from a+b+c+d+e+f to a+b, due to them paying a higher price.

A significant flaw in the theory of tariffs lies in the assumption that domestic industries will respond to protection by improving their long-term competitiveness. While tariffs are intended to support domestic companies to become competitive, in practice, they may encourage complacency. The tariff protects inefficient firms from competition, reducing their incentive to lower costs or adopt more efficient production methods. As highlighted earlier, “inefficient industries may lack incentive to become more efficient long-term,” contradicting the theory that tariffs help infant industries become more competitive globally.

Furthermore, the theory assumes that domestic producers can scale up production to replace reduced imports. However, in reality, firms may lack the infrastructure to meet increased domestic demand immediately. This can create scarcity that drives up prices for consumers, leading to allocative inefficiency. Furthermore, higher production costs for domestic firms, which may persist despite the tariff, mean prices remain elevated even after foreign competition is reduced.

Another flaw comes from the broader impact on international trade relations. The theory assumes tariffs are isolated tools to correct dumping, but retaliation from trading partners is often overlooked. Retaliatory tariffs can harm domestic exporters, undermining the net benefits of protectionism. Retaliatory tariffs on primary goods may cause inflation in the US, raising prices for consumers even more.