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Copyright ©2004, South-Western College Publishing International Economics By Robert J. Carbaugh 9th Edition Chapter 5: Tariffs.

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Presentation on theme: "Copyright ©2004, South-Western College Publishing International Economics By Robert J. Carbaugh 9th Edition Chapter 5: Tariffs."— Presentation transcript:

1 Copyright ©2004, South-Western College Publishing International Economics By Robert J. Carbaugh 9th Edition Chapter 5: Tariffs

2 Carbaugh, Chap. 5 2 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 Tariffs

3 Carbaugh, Chap. 5 3 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 budget (no longer important in industrial countries) Tariffs

4 Carbaugh, Chap. 5 4 Types of tariff Specific tariff ( ) Fixed monetary fee per unit of the product Example: A specific tariff of $10 on each imported bicycle with an international price of $100 means that customs officials collect the fixed sum of $10. Tariffs

5 Carbaugh, Chap. 5 5 Ad valorem tariff ( ) Levied as a percentage of the value of the product Example: A 20% ad valorem tariff on bicycles generates a $20 payment on each $100 imported bicycle. Compound tariff ( ) A combination of the above, often levied on finished goods whose components are also subject to tariff if imported separately

6 Carbaugh, Chap. 5 6 Effective rate of protection The impact of a tariff is often different from its stated amount The effective tariff rate is an indicator of the actual level of protection that a nominal tariff rate provides the domestic import- competing producers. Tariffs

7 Carbaugh, Chap. 5 7 Effective rate of protection One must consider both the effects of tariffs on the final price of a good, and the effects of tariffs on the costs of inputs used in production. The actual protection provided by a tariff will not equal the tariff rate if imported intermediate goods are used in the production of the protected good. Example: A European airplane that sells for $50 million has cost $60 million to produce. Half of the purchase price of the aircraft represents the cost of components purchased from other countries. A subsidy of $10 million from the European government cuts the cost of the value added to purchasers of the airplane from $30 to $20 million. Thus, the effective rate of protection is (30-20)/20 = 50%.

8 Carbaugh, Chap. 5 8 Effective rate of protection (contd) Domestic producers may use imported inputs or intermediate goods subject to various tariffs, which affects the calculation 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 Tariffs

9 Carbaugh, Chap. 5 9 Avoiding and postponing tariffs (US) Production sharing and special treatment for foreign assembly using domestic components Bonded warehouses Foreign trade zones Tariffs

10 Carbaugh, Chap Costs and Benefits of a Tariff A tariff raises the price of a good in the importing country and lowers it in the exporting country. As a result of these price changes: Consumers lose in the importing country and gain in the exporting country Producers gain in the importing country and lose in the exporting country Government imposing the tariff gains revenue To measure and compare these costs and benefits, we need to define consumer and producer surplus.

11 Carbaugh, Chap 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 Tariffs

12 Carbaugh, Chap Consumer and producer surplus Tariffs

13 Carbaugh, Chap Useful definitions: The terms of trade is the relative price of the exportable good expressed in units of the importable good. A small country is a country that cannot affect its terms of trade no matter how much it trades with the rest of the world. The analytical framework will be based on either of the following: Two large countries trading with each other A small country trading with the rest of the world Basic Tariff Analysis

14 Carbaugh, Chap Tariff trade and welfare effects Welfare effects of tariffs

15 Carbaugh, Chap Tariff trade and welfare effects Welfare effects of tariffs

16 Carbaugh, Chap 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 Tariff effects

17 Carbaugh, Chap 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 Reasons for tariffs

18 Carbaugh, Chap 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 Reasons for tariffs

19 Carbaugh, Chap 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 Reasons for tariffs


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