TRADE RESTRICTIONS: TARIFFS

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TRADE RESTRICTIONSTARIFFS

• Commercial policies
• Restrictions imposed by nations on the free flow
  of goods, services assets.
• Tariffs
• One of the commercial policies.
• Tax imposed on export or import.

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Why restrict trade?

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

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Purpose of Tariffs

• Tariffs may be imposed for protection or revenue
  purposes.
• Protective tariff - designed to insulate domestic
  producers from competition
• Revenue tariff - intended to raise funds for the
  government (no longer important in industrial
  countries)

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Types of Tariffs

• Export tariff
• Duty on exported commodity
• Prohibited by U.S. constitution
• Import tariff
• Duty on the imported commodity.

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Types of Import Tariffs

• Ad valorem
• fixed percentage of the value
• Specific
• Fixed sum per physical unit
• Compound
• A combination of the above, often levied on
  finished goods whose components are also subject
  to tariff if imported separately

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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.

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Effective Rate of Protection

• Nominal tariff (t) t (P'-
  P)/P whereP International price of the final
  goodP' Domestic price of the final good after
  tariff
• Effective rate of protection (e) Percentage
  increase in domestic value added as a result of
  tariffs g (V' - V)/V whereV Domestic
  value added under free tradeV' Domestic value
  added with tariffs on inputs output
• Domestic value added
• Price of the final commodity minus cost of the
  imported inputs going into the production of the
  commodity.

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Tariff Escalation

• 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.

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Production sharing

• Occurs when certain aspects of a product's
  manufacture are performed in more than one
  country
• Foreign assembly of TV is an example. It is
  designed to
• take advantage of unique technology, labor
  skills, raw materials, labor cost etc. to reduce
  unit cost
• penetrate foreign markets with restrictions on
  exporting finished goods

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Offshore-assembly provision (OAP)

• U.S. trade policy provides favorable treatment to
  products assembled abroad from U.S. manufactured
  components.
• U.S. import duties apply only to the value added
  in the foreign assembly process provided that
  U.S.-made components are used by U.S. or overseas
  companies in their assembly operation.
• Goods under OAP include motor vehicles, office
  machines, TVs, aluminum cans semiconductors.

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Postponing Import Duties

• Paying import duty on the entire years supply of
  components at one time might be too expensive for
  the importer. U.S. trade laws allow U.S.
  importers to postpone their duty obligations
  through
• Bonded warehouses
• Foreign trade zones

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Postponing Import DutiesBonded Warehouse

• Dutiable imports can be brought into a customs
  territory and left in a bonded warehouse duty
  free.
• It is operated under the lock key of the U.S.
  Customs Service.
• Imported goods can be stored, repacked or further
  processed duty free in the warehouse.
• Goods may be re-exported duty free or withdrawn
  for domestic sale by paying duties.
• If good are not kept in the warehouse, duties
  must be paid drawback (refund of 99 of the
  duties paid) can be claimed after it is
  re-exported.

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Postponing Import DutiesForeign-Trade Zones

• Bonded warehouses are more costly due to U.S.
  Customs Service inspection surveillance. U.S.
  govt. permits importers to use a less expensive
  foreign-trade zone (FTZ) within U.S.
• U.S. Customs Service officers monitor FTZs by
  performing audits spot inspections
• 17 FTZs in 1970 in the U.S. As of 2002, 240 FTZs
  housing more than 2500 firms.
• FTZs account for only 2 of merchandise exports
  imports of the U.S.
• Among businesses enjoying FTZs are Caterpillar,
  Chrysler, Eli Lilly, GE IBM.

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Effects of a Tariff on Production, Consumption
Revenue

• Consumption effects
• Reduction of domestic consumption.
• Production effects
• Expansion of domestic production.
• Revenue effects
• Revenue collected by the govt.

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Tariff Welfare Effects

• 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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Who Pays for Import Restrictions?

• Domestic consumers face increased costs
• Low income consumers are especially hurt by
  tariffs on low-cost imports
• Overall net loss for the economy (deadweight
  loss)
• Export industries face higher costs for inputs
• Cost of living increases
• Other nations may retaliate, further restricting
  trade

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Arguments for Trade Restrictions

• Job protection against cheap foreign labor
• Fairness in trade - level playing field
• Protect domestic standard of living
• Equalization of production costs
• Infant-industry protection
• National defense
• Political social reasons
• Cure balance of trade deficit

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Politics of Protectionism

• Supply of protectionism (trade policy) depends
  on
• the cost to society of restricting trade
• the political importance of the import-competing
  industries
• Magnitude of the adjustment costs from free trade
• Public sympathy for those sectors hurt by free
  trade

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Politics of Protectionism

• Demand for protectionism depends on
• The amount of the import-competing industrys
  comparative disadvantage
• The level of import penetration
• The level of concentration in the affected sector
• The degree of export dependence in the sector

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Information on Trade Restrictions

• The International Trade Commission gives
  information about U.S. tariffs
  http//www.usitc.gov/
• U.S. Department of Commerce/Bureau of Export
  administration provides information on export
  controls http//www.bxa.doc.gov
• For information on marketing, trade regulation,
  investment climate business travel
  http//www1.usatrade.gov/Website/ccg.nsf