trade restriction tariffs

7/24/2019 Trade Restriction Tariffs

1/25

InternationalInternational

EconomicsEconomicsTenth Edition

Trade Restrictions: Tariffs

Dominick Salvatore

John Wiley & Sons, Inc.

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

CHAPTER E I G H T

88


2/25

In this chapter:

Introduction

Partial Equilibrium Analysis of a Tariff

The Theory of Tariff Structure

General Equilibrium Analysis of a Tariff in aSmall Country

General Equilibrium Analysis of a Tariff in a

Large CountryThe Optimum Tariff



3/25

Introduction

While it is generally accepted that free trademaximizes world output and benefits allnations, most nations impose some

restrictions on the free flow of internationaltrade.

Trade policies are advocated by special

groups that stand to benefit from traderestrictions.



4/25

Import vs. export tariffs

Animport tariffis a tax or duty levied onimported commodities. This is the most common form of tariff.

Anexport tariffis a tax on exported

commodities. Prohibited by the U.S. Constitution, butoccasionally practiced in developing countriesto generate government revenue.

Introduction


5/25


Ad valorem tariff

A fixed percentage on the value of thetraded commodity.

Introduction



6/25


Ad valorem tariff

Specific tariff

A fixed sum per physical unit of a tradedcommodity.

Introduction



7/25


Ad valorem tariff

Specific tariff

A compound tariff

A combination of an ad valorem andspecific tariff.

Introduction



8/25

Tariffs have been sharply reduced since WorldWar II.

Tariffs average 5 percent or less on industrialproducts in developed nations, but are muchhigher in developing nations.

Introduction



9/25


Resulting Effects of Tariff Consumption effect

Reduction in domestic consumption

Production effect

Expansion of domestic production

Trade effect

Decline in imports

Revenue effect

Revenue collected by the government



10/25


Resulting Effects of Tariff

The more elastic the demand curve, thegreater the consumption effect.

The more elastic the domestic supply curve,the greater the production effect.

The more elastic the demand and domestic

supply curves, the greater the trade effect, andthe smaller the revenue effect.



11/25



Consumer surplusis the difference betweenwhat consumers would be willing to pay and

what they actually pay. Imposition of a tariff reduces consumer surplus.

Increase in producer surplus, or rent, is the

payment that need not be made in the long run toinduce domestic producers to supply additionalgoods with the tariff.

Also calledsubsidy effect of tariff.



12/25



Tariff redistributes income -

From domestic consumers (who pay higherprice for the commodity) to domestic producers(who receive the higher price)

From nations abundant factor (producingexports) to the scarce factor (producingimports).

This leads to inefficiencies, or protectioncosts(deadweight losses).



13/25

FIGURE 8-1Partial Equilibrium Effects of a Tariff.



14/25

FIGURE 8-2Effect of Tariff on Consumer and Producer Surplus.



15/25

FIGURE 8-3Partial Equilibrium Costs and Benefits of a Tariff.



16/25


The Rate of Effective Protection

Indicates how much protection is actuallyprovided to domestic producer of import-

competing commodity.When a nation imposes a lower tariff onimported inputs than on the final commodityproduced with the inputs, therate of effectiveprotection exceeds the nominal tariff rate.



17/25


The Rate of Effective Protection Calculated as follows:


g=

t- aiti

1 - ai

g= rate of effective protection

t= nominal tariff rate on final commodityai= ratio of cost of imported input to price of final

commodity with no tariff

ti= nominal tariff rate on imported input


18/25


The Rate of Effective Protection Calculated as follows:


g =

t - aiti

1 - aiConclusions

If ai= 0, g= t

For given values of aiand t

i, gis larger the greater ist

For given values of tand ti, gis larger the greater isai The value of gis >, = or < t, as ti t

When aiti> t, the rate of effective protection is negative


19/25

FIGURE 8-4Pre- and Post-Uruguay Round Cascading TariffStructure in Industrial Countries.



20/25


A small nation will not affect prices on the worldmarket when imposing a tariff.

Domestic price of importable commodity will rise

by the full amount of the tariff forindividualproducers and consumersin the small nation.

Price remains constant fornation as a wholebecause

the nation collects the tariff. Volume of trade for small nation declines, but termsof trade do not change, so welfare always falls.



21/25

FIGURE 8-5General Equilibrium Effects of a Tariffin a Small Country.



22/25


Stolper-Samuelson Theorem

An increase in the relative price of acommodity (for example, as the result of a

tariff) raises the return of the factor usedintensively in production of the commodity.

Thus, the real return to the nations scarce

factor of production will rise with theimposition of a tariff.



23/25

General Equilibrium Analysis of a Tariff in aLarge Country

A tariff causes the imposing nations offer curve toshift or rotate toward the axis measuring theimportable commodity by the amount of the tariff.

Under these circumstances, for a large nation: A reduction in trade volume will reduce welfare

An improvement in terms of trade will increase

welfare Whether welfare actually rises or falls depends onnet effect.



24/25

FIGURE 8-6General Equilibrium Effects of a Tariffin a Large Country.



25/25

The Optimum Tariff

Anoptimum tariffmaximizes the net benefit resultingfrom the improvement in the nations terms of tradeagainst the negative effect from declining trade volume.

As the terms of trade improve for the imposing nation,those of the trade partner deteriorate, reducing welfarefor the trade partner.

Trade partner will likely retaliate and impose its own

optimum tariffs. World as a whole is made worse off as gains fromoptimum tariff are less than losses of trade partner.


trade restriction tariffs

Documents