Paper Title
U.s. Import tariff and U.S. - germany trade

Abstract
One of the objectives of import tariff recently imposed by the United States on its import of steel and aluminum was to curb its trade deficit. And one of the countries that have been a subject to this tariff is Germany. In this paper we investigate the impact of such tariff on U.S. - Germany trade, especially whether or not the policy will help the United States curb its trade deficit with Germany. One of the ways an import tariff affects is it raises the price of the importable in domestic market, lowers its domestic demand, and ultimately lowers its import, which, in turn, leads to the improvement in the importing country’s trade balance in the long run. In the short run, however, it deteriorates the trade balance, because, it takes time for the domestic consumers of foreign products to adjust their demand to the price increase caused by import tariff. As a result the demand for foreign products does not fall immediately following the tariff laid price increase, which raises the nation’s import bills for the time being leading to the deterioration of trade balance. This short-run deterioration and a long-run improvement of trade balance brought about by an import tariff produce a J-curve phenomenon. In exporting countries, on the other hand, such a tariff lowers their export causing a fall in the supply of the foreign currency the export is denominated in, thereby raising the price of the foreign currency. This exchange rate effect then leads to an appreciation of the foreign currency producing an inverse J-curve effect in the importing country. In this study, we test the J-curve effect on trade between the U.S. and Germany using the vector error correction model (VECS). In the long run equation, the coefficient associated with the exchange rate variable, 〖EX〗_t has been found to be negative but insignificant, implying that any depreciation or appreciation of the U.S. dollar resulting from the fall in U.S. import from Germany, in turn, resulting from the imposition of U.S. tariff on the import of steel and aluminum will have no effect on U.S. trade balance with Germany in the long run. In the short-run equation, on the other hand, the coefficients associated with the variables 〖ΔEX〗_(t-1) has been found to be positive but insignificant while that associated with 〖ΔEX〗_(t-2) has come out to be both positive and significant at 5% significance level, which implies that any depreciation (appreciation) of the U.S. dollar resulting from the imposition of the U.S. import tariff will improve (deteriorate) U.S. trade balance with Germany in the short run. This finding indicates that there is an absence of the J-curve effect in the U.S. – Germany trade. Also, the coefficient associate with the error-correction term, ECT, is negative and significant, implying that any short term fluctuation in U.S. trade balance with Germany will be adjusted at the speed of 99% toward its long-run value. JEL Classification: F3 Key Words- J-curve effect, export-to-import ratio, exchange rate, unit root, cointegration