Topic 1 • World Economy, Trade Policy & Tariffs (Class Page)

The Implications of Trump’s Return on U.S. Trade Policy

Focus question: If tariff-first trade policy returns, what happens to prices, jobs, supply chains, and geopolitical alignment?

Concept Terms-of-trade, incidence, retaliation, pass-through

Macro link Inflation, growth, productivity, exchange rates

Markets Sector winners/losers, uncertainty, risk premium

Instructor note (use in class): The simulation and survey are educational. They are not forecasts and should not be interpreted as investment advice or policy prediction.

Quick framing: what can change fast?

Tariff schedule (rates, product scope, exemptions) can change quickly via executive actions and agency processes.
Enforcement intensity (customs audits, anti-dumping/countervailing duties) can raise effective trade costs beyond published rates.
Export controls & sanctions can rewire supply chains even without “tariffs” (especially in semiconductors, AI, telecom).
Credibility & uncertainty affect investment and pricing decisions today (option value of waiting).

Suggested 3-minute opening mini-lecture

Trade policy is not just “tariff rates.” It is a bundle: tariffs/quotas, export controls, industrial policy, and diplomacy. Even when the legal authority is unchanged, expectations about escalation and retaliation alter corporate sourcing, inventory, and pricing.

Discussion Topics

U.S.–China trade relations: Would a second Trump presidency escalate existing tariffs or broaden them (scope/rates)?
Global supply chains: Where would firms re-route sourcing (Mexico/Vietnam/India/nearshoring)? Which sectors are most exposed?
Protectionism vs. free trade: Compare short-run job “visibility” vs. longer-run productivity and consumer cost effects.
Geopolitics: How does trade policy interact with alliances, security policy, and technology competition?

In-class structure (simple)

1) Assign 4 groups (China, supply chain, macro/politics, geopolitics). 2) Each group prepares 3 claims + 1 counterargument. 3) Whole-class synthesis: identify “who pays,” “who gains,” and “what adjusts” (prices, quantities, FX, or production location).

Key economic mechanisms to watch

Incidence: Who bears the tariff (foreign exporters vs. U.S. importers/consumers) depends on elasticities and market power.
Retaliation: Export-heavy sectors (agriculture, capital goods) often face targeted counter-tariffs.
Uncertainty channel: “Wait-and-see” investment slows capex; inventories rise; risk premia increase.
Third-country substitution: Trade can re-route via intermediaries, changing who captures the value-add.
FX channel: Tariffs can strengthen or weaken the dollar depending on capital flows and risk sentiment.

Policy Tools and Typical Effects

Use this table to anchor discussion and the simulation game below.

Policy Tool	Potential Action	Domestic Impact (typical)	Global Impact (typical)
Tariffs	High tariffs on imports (e.g., steel/aluminum, China goods)	Boost for protected producers; higher input costs; pass-through to consumer prices; uncertainty for import-reliant firms.	Retaliation risk; reduced market access for U.S. exporters; alliance strain if applied broadly.
Quotas	Import caps on key goods (cars, components)	Quantity restrictions can cause delays/shortages; can encourage FDI/relocation; may raise prices more than tariffs.	WTO dispute risk; supplier reallocation; potential “managed trade” bargaining.
Trade War	Escalation with China/EU (tariffs + retaliation cycle)	Sectoral job churn; export losses; volatility; growth drag via uncertainty.	Global market destabilization; alternative blocs/agreements excluding the U.S.
Sanctions	Target industries (semiconductors, rare earths)	Domestic expansion in strategic sectors possible; near-term supply chain disruption.	Tech fragmentation; targeted countries build substitutes and diversify partners.
Trade agreement renegotiation	Renegotiate or threaten withdrawal (USMCA/WTO posture)	Potential bargaining gains; but negotiation uncertainty deters investment.	Allies seek alternatives; leadership credibility risk.
Currency manipulation labels	Label country as manipulator to justify penalties	May support exporters if USD weakens; increases uncertainty for importers.	Financial/trade retaliation; escalates diplomatic tensions.
Export controls	Restrict sensitive technologies (AI, chips, 5G)	Revenue loss for some firms; innovation incentives in targeted areas.	Competing standards; accelerated foreign substitution; tech blocs.
Reshoring incentives	Tax credits/subsidies to relocate production	Jobs in targeted sectors; costlier production; fiscal cost.	Supply chain disruption; partner retaliation; subsidy competition.

Instructor “cold call” prompts (fast)

Which tool hits prices fastest: tariffs or quotas? Why?
Which tool is most likely to cause a technology split across countries?
Which tool is most likely to trigger a legal dispute (WTO/USMCA)?
What is the “political economy” benefit of policies that create visible winners?

Historical Parallels

Policy	Year	Purpose	Outcome
Smoot–Hawley Tariff Act	1930	Protect farmers and manufacturers	Retaliation and trade contraction; often cited as worsening the Great Depression environment.
Tariff of Abominations	1828	Protect Northern industry	Benefited Northern manufacturers; harmed Southern economy; intensified regional tensions.
U.S. Steel Tariffs	2002	Protect steel jobs	Higher steel costs for downstream users; WTO challenge; removed in 2003.
Voluntary Export Restraints (Japan autos)	1981	Protect U.S. auto industry	Higher U.S. car prices; Japanese automakers expanded U.S. production.
Multi-Fiber Arrangement (textiles)	1974–2004	Protect textiles in developed economies	Higher consumer prices; after phase-out, imports rose substantially, pressuring domestic producers.

“Tariffs vs. Quotas” (one-slide takeaway)

Tariffs raise the price of imports; quantity can still adjust.
Quotas restrict quantity; price can spike more (especially if demand is inelastic).

Key distribution question: Who captures the “quota rents” (foreign exporters, import license holders, domestic firms)?

Optional deeper point: why retaliation targets politics

Retaliation often focuses on politically salient export industries (e.g., agriculture) to increase domestic pressure to reverse policy. This “political targeting” matters as much as economic incidence.

Industry Impacts (typical channels)

Industry	Impact of Tariff	Jobs	Cost of Living	Availability
Automotive	Tariffs on cars/parts raise production costs; supply chain complexity is high.	Potential gains in protected segments; losses in import-dependent assembly.	Higher vehicle prices.	Fewer models; delays if parts constrained.
Technology	Tariffs on components raise BOM costs; export controls add non-price constraints.	Possible reshoring in targeted nodes; export-dependent losses.	Higher electronics prices.	Slower new-model availability; substitution.
Agriculture	Import protection helps some producers; retaliation risk is high for exports.	Domestic gains possible; export-heavy regions vulnerable.	Food prices can rise (imports, inputs).	Seasonal scarcity without imports.
Steel & Aluminum	Protects upstream metals; raises costs for downstream users.	Upstream jobs may rise; downstream jobs may fall.	Higher prices for appliances, cars, construction.	Domestic supply may not match variety/quality.
Textiles & Apparel	Tariffs raise retail costs; reshoring limited by cost differentials.	Some domestic gains; retailer pressure.	Clothes and shoes more expensive.	Fewer low-cost options.
Pharmaceuticals	Input tariffs can raise drug costs; supply is specialized and regulated.	Limited quick reshoring.	Potentially higher essential-medicine costs.	Shortages if inputs disrupted.
Consumer goods	Tariffs often hit everyday items; domestic substitutes may be limited.	Few new jobs; distribution shifts.	Broad price increases.	Delays and stockouts possible.

Key insight triad: (1) Jobs may rise in protected industries; (2) prices typically rise where imports are a large share; (3) availability falls when supply chains are complex and time-sensitive.

Tariff Survey (in-class)

Complete the survey, then click Save. Your results stay in your browser (localStorage). You can export JSON/CSV.

Not saved yet.

Instructor use: quick interpretation

Compare distribution (polarization) vs. average response.
Ask: “Which sector do you think pays the most?” and connect to incidence.
Ask: “Where do you expect firms to re-route supply chains?” and connect to third-country substitution.

Optional: 2 short writing prompts (if you want them)

If you truly want no homework on tariffs, keep these as in-class exit ticket prompts (5 minutes).

Prompt A (exit ticket): Strong USD vs. weak USD—who wins and who loses?

Prompt B (exit ticket): If tariffs rise, what happens to inflation and supply chains in the next 6–12 months?

Game: Tariff Trade Simulation (simple)

Choose a policy tool and a target. The simulation updates a scoreboard each round. This is a teaching toy, not a forecast.

Policy tool

Target

Intensity

Instructor prompts (after 2–3 rounds)

Which policies raise the CPI fastest in the simulation? Does that match your intuition?
When “retaliation” triggers, which sector gets hit first? Why do governments retaliate that way?
What tradeoff do you observe between “manufacturing jobs” and “alliances score”?
How could a stronger USD offset or amplify the effects?

How to play (student-facing)

Select a policy tool, a target, and intensity.
Click Play Round to update outcomes.
Optional: click Draw Shock Card (retaliation, WTO dispute, subsidy response, inventory crunch).
After 3–5 rounds, write: “Who paid, who gained, what adjusted?”

Important: The scoreboard is an illustration of directional effects (price pressure, disruption, geopolitics). Real-world outcomes depend on elasticities, firm behavior, and policy details.

Chapter 1 – Part 1: World Economy Review (2024)

Paste/update your preferred sources and numbers here each term.

Aspect	Details	Source (you can replace)
Global Growth	Global economy grew by 3.2%, with inflation declining to ~4.2%.	IMF / news recap
United States	~2.7% growth supported by consumption and labor resilience.	IMF / news recap
Euro Area	~0.7% growth; manufacturing and energy-related headwinds.	IMF / news recap
China	Growth slowed vs. earlier years; exports remain globally significant.	IMF / news recap
Trade Policies	Policy uncertainty and tariff risk cited as headwinds to trade and investment.	IMF / news recap

Optional “so what?” (bridge into tariffs)

Global growth is modest. In that environment, trade frictions can have outsized effects by raising costs and reducing confidence. The “uncertainty channel” matters as much as the mechanical tariff rate.

Currency performance recap (example table)

You can paste your full table; this page supports as-is content.

Currency	Jan 1 Rate	Dec 31 Rate	Change	Direction vs USD
EUR	1 EUR = 1.1038 USD	1 EUR = 1.0350 USD	-6.23%	Weakened
GBP	1 GBP = 1.2731 USD	1 GBP = 1.2516 USD	-1.69%	Weakened
JPY	1 USD = 140.94 JPY	1 USD = 157.36 JPY	+11.65% (USD↑)	JPY weakened
CNY	1 USD = 7.0786 CNY	1 USD = 7.2979 CNY	+3.10% (USD↑)	CNY weakened

Discussion bridge: Tariffs can affect FX through trade balances, but capital flows and risk sentiment often dominate in the short run.

Part 2: Currency Conversion Practice (auto-check)

Enter values and click “Check.” Explanations appear immediately.

1) Gold peg arbitrage (USD vs GBP)

If gold is pegged at $1800 per ounce in the U.S. and £1200 per ounce in the UK: what is the implied fair exchange rate (USD per GBP)?

Your answer (USD per GBP):

2) Cross rate (EUR–JPY)

If 1 EUR = 1.18 USD and 1 USD = 110 JPY, what is JPY per EUR?

Your answer (JPY per EUR):

3) Cross rate (GBP–CHF)

If 1 EUR = 0.85 GBP and 1 CHF = 1.10 EUR, what is CHF per GBP?

Your answer (CHF per GBP):

Optional: implied exchange-rate calculator

Compute cross rates quickly: (A/USD) × (USD/B) = A/B.

A per USD

USD per B

Arbitrage reminder

If the implied cross rate differs materially from the quoted cross rate, and transactions are frictionless, you can execute a triangle to lock in a profit. In reality: spreads, fees, and constraints often eliminate profits.