Question

President Trump imposed a 25% tariff on imports from China. Using your knowledge of real exchange rates (including related graphs/equations), explain the possible effects of this policy on the long run real exchange rate between the US dollar and Chinese Yuan.

Answer 1

Imposing tariffs on the imports from China by USA would cause trade tranctions between the two country's to fall.

As a cause of this, US trade deficit would improve as with high tariffs the prices of the goods impoted before will now become expensives or dearer, and hence their demand would fall. Consequently, the demand for yuan would fall.

The exchange would be affected by the demand for international currencies in the open market. High tarrifs would reduce the demand for yuan would fall and hence value for dollars would rise.

This policy would hurt China badly as its production would not find an efficient market for earning profits. US would be affected less