Problem Statement: The European Union (EU) imposes a quota on the import of steel products from China to protect its domestic steel industry. In 2019, the EU set a quota of 22.5 million tons of steel products per year, which is approximately 70% of the average annual imports from China between 2015 and 2017. Policy: The EU’s quota policy aims to reduce the imports of cheap Chinese steel, which are alleged to be subsidized by the Chinese government, and hence, unfairly priced. By limiting the quantity of steel imports, the EU hopes to protect its domestic steel industry, which has been facing significant competition from Chinese imports.

Numbers: Before the quota, China was exporting around 30 million tons of steel products to the EU annually. The quota is expected to reduce this amount by approximately 7.5 million tons.

Evaluation:

Short-run effects:

• The quota will lead to a reduction in steel imports from China, resulting in an increase in the domestic production of steel in the EU.
• This will lead to an increase in employment and output in the EU’s steel industry.
• However, the quota will also lead to an increase in the price of steel in the EU, as domestic producers will have to supply the reduced demand.

Long-run effects:

• The quota may lead to the development of alternative sources of steel supply, such as increased production from EU-based steel companies or imports from other countries.
• The quota may also lead to the improvement of productivity and efficiency in the EU’s steel industry, as domestic producers will have to innovate to compete with cheaper imports.

Assumptions in the model:

• The quota will be effectively enforced, and there will be no significant smuggling or evasion of the quota.
• The demand for steel in the EU is relatively inelastic, meaning that changes in price will not significantly affect the quantity demanded.
• The EU’s steel industry is capable of increasing production to meet the reduced demand.

Pros:

• The quota will protect the EU’s domestic steel industry and prevent the loss of jobs and capacity.
• The quota will also help to reduce the EU’s trade deficit with China.

Cons:

• The quota will lead to an increase in the price of steel, which will negatively affect downstream industries, such as construction and manufacturing.
• The quota may be seen as protectionist and could lead to retaliatory actions from China, potentially sparking a trade war.
• The quota may also distort trade and lead to inefficient resource allocation, as domestic producers may not be as efficient as Chinese producers.