Answer to Question #76819 in Macroeconomics for Pearl

Question

Suppose the US imposes prohibitive tariffs on all Australian exports , and in exchange, Australia retaliates on all imports from the US. Assuming that this trade war lasts for at least one year, discuss policy implications. Focus on variables such as exchange rates, balance of payments, output, inflation, interest rates, etc. May discuss from a single country’s point of view (either Australia or US). Address briefly social and/or cultural factors and their implications.

Answer 1

If the US imposes prohibitive tariffs on all Australian exports , and in exchange, Australia retaliates on all imports from the US, then both countries will be worse off, output will decrease, balance of payments will change too (the direction depends on the sizes of imports and exports), inflation will rise, exchange rates may also change, if the currencies will devaluate. There may be also some changes in cultural and social spheres, as the relations between countries will become more complicated.