**US Drywall Exports Face Ongoing Canadian Tariffs**

• Correct supply and demand diagram with world price ($P_w$) / supply below domestic equilibrium price. 1 mark
• Upwards shift in world supply curve ($P_{w}+t$), change in imported quantity shown (student may also add the exact quantities from the text). 1 mark
• Axes and curves correctly labeled, government revenue, and welfare loss. 1 mark

• The imposition of tariffs can lead to an increase in aggregate demand (AD) from $AD_1$ to $AD_2$ as the tariffs make domestic drywall more competitive, increasing net exports.
• The increase in net exports (a component of AD) may stimulate higher demand for drywall, potentially leading to higher output and cyclical employment in the drywall industry, as firms respond to the increased demand by expanding production.
• Therefore, tariffs lead to a decrease in cyclical unemployment in the drywall industry.

2 marks for correct diagram OR explanation

4 marks for correct diagram AND explanation

• In the AD/AS diagram, an increase in government spending shifts the aggregate demand (AD) curve to the right from $AD_1$ to $AD_2$.
• As the government uses tariff revenues for rebuilding efforts, this injects more money into the economy, boosting demand for goods and services.
• Consequently, real GDP increases as businesses respond to the higher demand by increasing output (Yrec to Yp).

2 marks for correct diagram OR explanation

4 marks for correct diagram AND explanation

• With reduced competition in the drywall market, the monopolist (CTGC) has more market power to set prices higher than in a competitive market.
• In the monopoly diagram, the marginal cost (MC) curve intersects the average total cost (AC) curve at a lower output level than the demand curve (D), when there is reduced competition.
• As a result, the monopoly will be at abnormal profit, leading to higher prices for consumers and a possible reduction in the quantity of drywall produced and consumed.

2 marks for correct diagram OR explanation

4 marks for correct diagram AND explanation

• In the inflationary gap diagram, the economy is operating above full employment, where aggregate demand ($AD_2$) exceeds aggregate supply ($SRAS_1$) at the natural level of output.
• Increased construction costs due to tariffs raise production costs for construction firms, leading to higher prices for housing and other construction projects.
• This cost-push inflation causes the short-run aggregate supply (SRAS) curve to shift leftward to $SRAS_2$, further widening the gap between AD and AS, which increases inflationary pressures in Canada.

2 marks for correct diagram OR explanation

4 marks for correct diagram AND explanation

Answers may include:

Definition

• Tariff: Tax levied on imported goods.

• Economic growth: An increase in a country's real output (real GDP) over a period time.

• Economic development: The process of increasing real per capita income while improving living standards and reducing poverty within an economy as whole.

• Economic growth refers to increases in real output over time, whereas economic development refers to a process that leads to improved living standards for a population as a whole.

• Increasing levels of output and incomes resulting from economic growth do not, by itself, guarantee economic development.

Protection of Domestic Industry and Employment

Short-Term Industrial Gains

• The tariffs were imposed after US firms were found guilty of dumping drywall below market value, causing harm to Canada’s only Western drywall producer, CTGC.
• As a result of protection, CTGC increased its workforce by 30 employees, and domestic production rose from 90M m² to 110M m² between 2021 and 2023 (Table 2).
• This supports industrial resilience and job preservation, especially in a strategically important sector supplying construction materials for residential, commercial, and public projects.

Diagram: Tariff on Imports

• A tariff shifts the world supply curve upward, increasing the domestic price, reducing import quantity, and increasing domestic producer surplus, potentially supporting GDP growth in the short term.

Limitations

• Tariffs reduce market competition, potentially resulting in higher long-term prices and reduced innovation.
• If CTGC becomes complacent, dynamic efficiency may decline, harming long-run productivity and competitiveness.

Rising Construction Costs and Reduced Affordability

Impact on Key Development Sectors

• Tariffs led to higher input costs, with drywall cost increases translating to a CAD 5,000 rise in single-family home construction, and CAD 3,000 increases for townhouses and apartments (Table 1).
• This particularly affects affordable housing, as stated by the Canadian Construction Association, potentially delaying or downsizing essential infrastructure such as schools and hospitals.

Diagram: Cost-Push Inflation (AD/AS)

• Increased input costs shift the short-run aggregate supply (SRAS) curve leftward, leading to higher prices and lower real output, slowing economic growth and straining household budgets.

Limitations

• The increase in construction costs is relatively small (2% or less) compared to total project cost, so the broader macroeconomic effect on growth may be limited in scale unless compounded by other material cost increases.
• If tariff revenues are reinvested into construction (as suggested by industry groups), the development impact could be offset.

Trade-Off Between Growth, Competition, and Development

Reduced Competition and Long-Term Efficiency Concerns

• Import volumes have declined from 120M m² in 2021 to 95M m² in 2023 (Table 2), indicating a contraction in foreign competition.
• While CTGC benefits, reduced competition may lead to price markups, harming consumer welfare and potentially reducing allocative efficiency in the construction sector.

Potential Use of Tariff Revenues

• Industry stakeholders suggest that revenues could fund rebuilding in fire-affected areas or subsidize public construction projects, helping to offset development costs.
• If revenues are redirected effectively, this may improve development outcomes, particularly in infrastructure and disaster recovery.

Limitations

• Tariff revenues are only effective if they are equitably redistributed, and if government spending is efficient. Otherwise, they may be absorbed into general budgets, providing minimal direct benefit to affected sectors.

Impact on Economic Growth Through Investment and Confidence

Short-Term Industry Stimulus

• The rise in domestic production and increased employment support investment in domestic manufacturing, potentially contributing to GDP growth through a multiplier effect.

Investment Deterrents in Construction

• Increased uncertainty about input costs may discourage private sector investment, particularly in large-scale housing or public infrastructure projects.
• Tariff volatility (e.g., shift from fixed 276% to flexible tariff system) increases risk perception, potentially reducing long-term investor confidence.

Overall Evaluation

Strengths

• The tariff helped revive domestic production, supporting employment and stabilizing a key national manufacturer.
• Short-term economic growth may be stimulated through industrial protection and reduced reliance on foreign imports.
• Tariff revenue could be reinvested in public infrastructure, partially offsetting construction cost increases.

Weaknesses

• Increased input costs lead to higher housing and construction prices, negatively affecting affordability and slowing development in critical areas.
• Reduced competition could result in higher prices, inefficiency, and slower innovation in the long term.
• Broader macroeconomic impact may be limited due to the small share of drywall in total construction costs, but sector-specific harm (e.g., affordable housing) may be significant.

Conclusion

Canada’s drywall tariff measures have provided short-term protection and employment gains, contributing to industrial growth. However, they have also increased construction costs, potentially slowing affordable housing development and raising inequality. The long-run effect on economic development depends on how revenues are used, whether domestic firms maintain efficiency, and if housing affordability is addressed through targeted policy responses. A balance must be maintained between industrial protection and economic inclusivity.