Transcript Document

International Economics
By Robert J. Carbaugh
7th Edition
Chapter 5:
Tariffs
Copyright ©2000, South-Western College Publishing
Tariffs
Why restrict trade?
 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
Carbaugh, Chap. 5
2
Tariffs
Defining 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 (no longer important in industrial
countries)
Carbaugh, Chap. 5
3
Tariffs
Types of tariff
 Specific tariff
 Fixed monetary fee per unit of the product
 Ad valorem tariff
 Levied as a percentage of the value of the
product
 Compound tariff
 A combination of the above, often levied on
finished goods whose components are also
subject to tariff if imported separately
Carbaugh, Chap. 5
4
Tariffs
Effective rate of protection
 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
Carbaugh, Chap. 5
5
Tariffs
Effective rate of protection (cont’d)
 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
Carbaugh, Chap. 5
6
Tariffs
Avoiding and postponing tariffs (US)
 Production sharing and special treatment
for foreign assembly
 Bonded warehouses
 Foreign trade zones
Carbaugh, Chap. 5
7
Tariffs
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
Carbaugh, Chap. 5
8
Tariffs
Price ($)
Price ($)
Consumer and producer surplus
5
B
4
Consumer surplus
3
2
1
0
5
Supply
(minimum price)
Producer
surplus
4
3
C (actual price)
A
Total
expenditure
D
0
Demand
(maximum
price)
E
2
4
6
8
Gasoline (gallons)
Carbaugh, Chap. 5
A
2
10
C (actual price)
Total
variable cost
1
B0
D
0
2
4
6
8
10
Gasoline (gallons)
9
Welfare effects of tariffs
Tariff trade and welfare effects
Small nation model
Price ($)
12,000
11,500
Sd
H
11,000
10,500
g
10,000
9,500
E
e
9,000
a
8,500
b
f
G
c
d
Sd+w+t
F
8,000
Sd+w
7,500
7,000
Dd
6,500
6,000
0
10
20
30
40
50
60
70
80
90
100
110
Quantity of autos
Carbaugh, Chap. 5
10
Welfare effects of tariffs
Tariff trade and welfare effects
Price ($)
Large nation model
Sd
E
9,600
Sd+w+t
G
8,800
a
c
b
8,000
7,800
d
e
F
Sd+w
Dd
0
10
20
30
40
50
60
70
80
90 100 110 120 130 140 150
Quantity of autos
Carbaugh, Chap. 5
11
Tariff effects
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
Carbaugh, Chap. 5
12
Reasons for tariffs
Arguments for trade restrictions
 Job protection
 Protect against cheap foreign labor
 Fairness in trade - level playing field
 Protect domestic standard of living
 Equalization of production costs
 Infant-industry protection
 Political and social reasons
Carbaugh, Chap. 5
13
Reasons for tariffs
Politics of protectionism
 “Supply” of protectionism (trade policy)
depends on:
 the cost to society of restricting trade
 the political importance of the importcompeting industries
 Magnitude of the adjustment costs from free
trade
 Public sympathy for those sectors hurt by free
trade
Carbaugh, Chap. 5
14
Reasons for tariffs
Politics of protectionism
 “Demand” for protectionism depends on:
 The amount of the import-competing industry’s
comparative disadvantage
 The level of import penetration
 The level of concentration in the affected sector
 The degree of export dependence in the sector
Carbaugh, Chap. 5
15