Transcript For the large importing country, the imposition of the tariff causes a

Chapter 8:
Analysis of a Tariff
McGraw-Hill/Irwin
©2012 The McGraw-Hill Companies, All Rights Reserved
The chapter has two major purposes:
• First, the analysis shows the effects of
a tariff when the importing country is
small, so that its import policies have
no effect on world prices.
• Second, the analysis of a large
importing country—one whose policies
can affect world prices—shows that a
large country can use a tariff to lower
the price that it pays foreigners for its
imports.
We begin by examining the effects of a
tariff imposed by a small country
(contrasted with free trade), using supply
and demand within the importing country.
Since foreign exporters do not change the
price that they charge for the product, the
domestic price of the imported product
rises by the amount of the tariff.
Domestic producers competing with these
imports can also raise their domestic
prices as the domestic price of imports
rises.
Figure 8.1 The U.S. Market for
Bicycles with Free Trade
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8-4
Figure
8.2 The
Effect
of a Tariff
Exports
Plus
Imports
as aon
Domestic
Producers
Percentage
of GDP
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8-5
 Domestic consumers of the product are
also affected by the imposition of the tariff.
They must pay a higher price (for both
imported and domestically produced
products), they reduce the quantity that
they buy and consume (a movement along
the domestic demand curve), and they
suffer a loss of consumer surplus.
 The government also collects tariff
revenue, equal to the tariff rate per unit
imported times the quantity that is
imported with the tariff in place (less than
the free-trade import quantity).
Figure 8.3 The Effect of a Tariff on
Domestic Consumers
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8-7
Market
forfrom a
FigureFigure
8.4 The2.2
NetThe
National
Loss
Motorbikes:
Supply
Tariff in Two Demand
Equivalentand
Diagrams
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8-8
Case study
Taxing exports
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8-9
For the large importing country, the
imposition of the tariff causes a triangle of
national loss (comparable to the one
shown for the small country) but also a
rectangle of national gain because the
price paid to foreign exporters is lowered,
for the units that the country continues to
import.
The net effect on the importing country
depends on which of these two is larger.
 For a suitably small tariff, the rectangle
is larger, so the importing country has a
net gain from imposing a tariff.
 A prohibitive tariff would cause a net
national loss, because the rectangle
would disappear. It is possible to
determine the country’s optimal tariff—
the tariff rate that makes the net gain to
the importing country as large as
possible.
 The optimal tariff rate is inversely related
to the price elasticity of foreign supply of
the country’s imports.
Figure 8.5 A Large Country Imposes
a Small Tariff
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8-12
 The analysis is affected in important ways if
the importing country is a large country, one
that has monopsony power in world markets.
 A large country can gain from the terms-oftrade effect when it imposes a tariff. The tariff
reduces the amount that the country wants to
import, so foreign exporters lower their price
(a movement along the foreign supply-ofexports curve).
 We analyze the large country case using the
international market (imports and exports),
and we show the tariff as driving a wedge
between import demand and export supply,
so the price to the import buyers exceeds the
price received by foreign exporters by the
amount of the tariff.
Figure 8.6 The Nationally Optimal
Tariff
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8-14
The optimal tariff causes a net loss to the
whole world. The loss to the foreign
exporting country is larger than the net
gain to the importing country. And a
country trying to impose an optimal tariff
risks retaliation by the foreign countries
hurt by the country’s tariff.
Illustrative Calculation of an
Effective Rate of Production
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8-16
World Trade Organization (WTO)
• Oversees the global rules for government
policies toward international trade. More than
150 member countries. Established 1995.
• Succeeds and subsumes the General
Agreement on Tariffs and Trade (“interim”
agreement, 1947).
• Principles:
Reductions of barriers to trade
Nondiscrimination among countries, often
called the most favored nation (MFN)
principle
No unfair encouragement for exports
Table 5.1 GATT and WTO rounds, 1947–
Round
Start
Duration
(months)
Geneva
Apr. 1947
7
Tariffs
23
Annecy
Apr. 1949
5
Tariffs
13
Torquay
Sep. 1950
8
Tariffs
38
Geneva II
Jan. 1956
5
Tariffs, admission of Japan
26
Dillon
Sep. 1960
11
Tariffs
26
Kennedy
May. 1964
37
Tariffs, anti-dumping
62
Tokyo
Sep. 1973
74
Tariffs, NTBsa
102
Uruguay
Sep. 1986
87
Tariffs, NTBs, services,
dispute settlement, textiles,
agriculture, WTO
123
Doha
Nov 2001
?
Tariffs, NTBs, labour
standards, environment,
competition, investment,
transparency, patents
141
Notes: a NTBs = Non-tariff barriers.
b
No. part. = Number of participants.
Source: Beugelsdijk et al. (2013)
Principal concern
No. part.b