International Economics By Robert J. Carbaugh 10th Edition

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International EconomicsBy Robert J.
Carbaugh10th Edition

• Chapter 4
• Tariffs

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Why restrict trade?
Tariffs

• Benefits of free trade come in the long term, and
  are usually spread widely across society
• Costs of free trade are felt rapidly and are
  usually concentrated in specific sectors of the
  economy (usually import-competing industries

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Defining tariffs
Tariffs

• A tariff is a tax (duty) levied on products as
  they move between nations
• Import tariff - levied on imports
• Export tariff - levied on exported goods as they
  leave the country
• Protective tariff - designed to insulate domestic
  producers from competition
• Revenue tariff - intended to raise funds for the
  government budget (no longer important in
  industrial countries)

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Types of tariff
Tariffs

• Specific tariff
• Fixed monetary fee per unit of the product
• Ad valorem tariff
• Levied as a percentage of the value of the
  product (much like a sales tax)
• Compound tariff
• A combination of the above, often levied on
  finished goods whose components are also subject
  to tariff if imported separately

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Selected US tariffs
Tariffs
Source U.S. International Trade Commission,
Tariff Schedules of the United States
(Washington, DC U.S. Government Printing Office,
2004) http//www.usitc.gov/taffairs.htm.
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Effective rate of protection
Tariffs

• The impact of a tariff is often different from
  its stated amount
• The effective tariff rate measures the total
  increase in domestic production that the tariff
  makes possible, compared to free trade
• Domestic producers may use imported inputs or
  intermediate goods subject to various tariffs,
  which affects the calculation

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Effective rate of protection (contd)
Tariffs

• When tariff rates are low on raw materials and
  components, but high on finished goods, the
  effective tariff rate on finished goods is
  actually much higher than it appears from the
  nominal rate
• This is referred to as tariff escalation

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Nominal effective tariff rates
Tariffs
Following the completion of the Tokyo Round of
Multilateral Trade Negotiations in 1979. Source
Alan Deardorff and Robert Stern, The Effects of
the Tokyo Round on the Structure of Protection,
in R. Baldwin and A. Krueger, The Structure and
Evolution of Recent U.S. Trade Policy (Chicago
University of Chicago Press, 1984), 368377.
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Tariff welfare effects

• A small country case
• Price taker
• A large country case
• Influence on world price

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Tariff welfare effects
Tariffs

• Consumer surplus
• The difference between the price buyers would be
  willing to pay and what they actually pay
• Producer surplus
• The revenue producers receive above the minimum
  amount required to induce them to produce a good

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Consumer and producer surplus
Tariffs
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Tariff trade and welfare effects (small country
case)

• Has no influence over world price
• Tariff increases gt price increases gt supply
  curve shifts

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Tariff trade and welfare effects
Welfare effects of tariffs
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• Redistribution effect
• Protective effect
• Consumption effect
• Redistribution effect

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Results of Tariff Small country case

• Tariff entirely falls on consumers
• Nations welfare decreases because of deadweight
  loss

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Tariff on welfare Large country case

• Has influence on world price

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Tariff trade and welfare effects
Welfare effects of tariffs
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Results of TariffLarge country case

• Redistribution effect
• Protective effect
• Revenue effect
• Consumption effect

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Results of Tariff (large country case)(contd)

• Deadweight loss
• Domestic consumers pay the bill, well partially
• Foreign producers pay another share of the bill
• National welfare, depends

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Policy Implication

• U.S. could increase tariff to a certain level
  Optimum tariff
• However, we should be careful

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Other impacts of Tariff

• Export industries face higher costs for inputs
• Cost of living increases
• Other nations may retaliate, further restricting
  trade

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Other impacts of tariff (contd)

• Poor people in U.S. more likely pay the price
• Young single mothers purchasing at Wal-Mart pay
  tariff rates 5 to 10 times higher than rich
  families purchasing at luxury stores.
• Job protection costs 1 million dollars to save
  one steel workers job (1986).

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ONE MILLION DOLLARS!