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International Economics By Robert J. Carbaugh 10th Edition Chapter 4: Tariffs.

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Presentation on theme: "International Economics By Robert J. Carbaugh 10th Edition Chapter 4: Tariffs."— Presentation transcript:

1 International Economics By Robert J. Carbaugh 10th Edition Chapter 4: Tariffs

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 (usually import-competing industries Carbaugh, Chap. 42 Tariffs

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) Carbaugh, Chap. 43 Tariffs

4 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 (much like a sales tax) Compound tariff – A combination of the above, often levied on finished goods whose components are also subject to tariff if imported separately Carbaugh, Chap. 44 Tariffs

5 Selected US tariffs Carbaugh, Chap. 45 Tariffs ProductDuty Rate Brooms32 cents each Fishing reels24 cents each Wrist watches (without jewels) 29 cents each Ball bearings2.4% ad valorem Electrical motors6.7% ad valorem Bicycles5.5% ad valorem Wool blankets1.8 cents/kg + 6% ad valorem Electricity meters16 cents each + 1.5% ad valorem Auto transmission shafts25 cents each + 3.9% ad valorem Source: U.S. International Trade Commission, Tariff Schedules of the United States (Washington, DC: U.S. Government Printing Office, 2004);

6 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 – Domestic producers may use imported inputs or intermediate goods subject to various tariffs, which affects the calculation Carbaugh, Chap. 46 Tariffs

7 Effective rate of protection (contd) 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. 47 Tariffs

8 Nominal & effective tariff rates Carbaugh, Chap. 48 Tariffs Product United StatesJapanEuropean Union Nominal rate (%) Effective rate (%) Nominal rate (%) Effective rate (%) Nominal rate (%) Effective rate (%) Agriculture, forestry, fish 1.8%1.9%18.4%21.4%4.8%4.1% Food, beverages, tobacco Textiles Wearing apparel Leather products – –2.2 Footwear Wood products – Furniture and fixtures Paper and paper products Printing and publishing – *Following the completion of the Tokyo Round of Multilateral Trade Negotiations in Source: Alan Deardorff and Robert Stern, The Effects of the Tokyo Round on the Structure of Protection, in R. Baldwin and A. Krueger, The Structure and Evolution of Recent U.S. Trade Policy (Chicago: University of Chicago Press, 1984), 368–377.

9 Tariff welfare effects A small country case – Price taker A large country case – Influence on world price Carbaugh, Chap. 49

10 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. 410 Tariffs

11 Consumer and producer surplus Carbaugh, Chap Tariffs

12 Tariff trade and welfare effects (small country case) Has no influence over world price Tariff increases => price increases => supply curve shifts Carbaugh, Chap. 4 12

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

14 Redistribution effect Protective effect Consumption effect Redistribution effect Carbaugh, Chap. 414

15 Results of Tariff Small country case Tariff entirely falls on consumers Nations welfare decreases because of deadweight loss Carbaugh, Chap. 415

16 Tariff on welfare Large country case Has influence on world price Carbaugh, Chap. 416

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

18 Results of Tariff Large country case Redistribution effect Protective effect Revenue effect Consumption effect Carbaugh, Chap. 418

19 Results of Tariff (large country case)( contd) Deadweight loss Domestic consumers pay the bill, well… partially Foreign producers pay another share of the bill National welfare,… depends Carbaugh, Chap. 419

20 Policy Implication U.S. could increase tariff to a certain level: Optimum tariff However, we should be careful… Carbaugh, Chap. 420

21 Other impacts of Tariff Export industries face higher costs for inputs Cost of living increases Other nations may retaliate, further restricting trade Carbaugh, Chap. 421

22 Other impacts of tariff (contd) Poor people in U.S. more likely pay the price – Young single mothers purchasing at Wal-Mart pay tariff rates 5 to 10 times higher than rich families purchasing at luxury stores. Job protection costs 1 million dollars to save one steel workers job (1986). Carbaugh, Chap. 422

23 ONE MILLION DOLLARS! Carbaugh, Chap. 423

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