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Chapter 8 Analysis of a Tariff. Chapter Objective To understand the effects of import tariffs on the imposing country and the world. 8.1 Introduction.

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Presentation on theme: "Chapter 8 Analysis of a Tariff. Chapter Objective To understand the effects of import tariffs on the imposing country and the world. 8.1 Introduction."— Presentation transcript:

1 Chapter 8 Analysis of a Tariff

2 Chapter Objective To understand the effects of import tariffs on the imposing country and the world. 8.1 Introduction

3 Contents Purposes for imposing a tariff Types of Tariffs Ways to measure tariff levels Effects of a tariff on a small country Effects of a tariff on a large country

4 8.2 The Evolvement of Tariffs What is a tariff ? The origin of tariffs: Tarifs The Evolvement of Tariffs

5 8.3 Why would a Country Impose a Tariff? Discourage consumption Generate revenue Reduce deficit in the balance of payment Protect domestic industries

6 8.4 Types of Tariffs Specific Tariffs Ad Valorem Tariffs

7 Import Tariffs MFN rates Ordinary rates Export Tariffs Transit Duties

8 Import Surtaxes General Import Surtaxes Specific Import Surtaxes Anti-dumping Duties Countervailing Duties

9 Variable Levy Common Agricultural Policy Target Price Threshold Price Variable Levy = Threshold Price - CIF Price

10 Preferential duties Lomé Convention 1975 ASEAN

11 Generalized System of Preferences History UNCTAD 1964 Geneva 1968 New Delhi The Group of 77

12 Preferences and Coverage Recipient Countries Products Covered Magnitude of Preference

13 GSP and China

14 8.5 Customs Tariff and Commodity Classification Customs Tariff Tariff No. Description of Goods Rate of Duty

15 Commodity Classification Customs Cooperation Council Nomenclature CCCN Standard International Trade Classification SITIC Harmonized Commodity Description and Coding System HS

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17 8.6 Ways to Measure Tariff Level simple average weighted average

18 8.7 What Happens When a Small Country Imposes an Import Tariff?

19 Consumer Surplus O Y 0 Y PYPY D P0P0 Expenditure Consumer Surplus

20 Producer Surplus O Y 0 Y PYPY S P0P0 Costs Producer Surplus

21 O Y 2 Y 4 Y 0 Y 3 Y 1 Y PYPY P1P1 P0P0 P1+tP1+t H ZF E VG SW+tSW+t SWSW ab c d DdDd SdSd

22 Loss in Consumer Surplus: a + b + c + d a : Redistribution Effect c : Revenue Effect b : Production Effect A deadweight loss from inefficient domestic production d : Consumption Effect A deadweight loss from higher price and lower consumption volume b+d : Total deadweight losses

23 8.8 What Happens When a Large Country Imposes an Import Tariff?

24 O Y 1 Y 3 Y 2 Y 0 Y PYPY P2P2 P0P0 P1P1 S d+W +t a b c d DdDd SdSd S d+W e t

25 a, b, c, d The same as in the small country case. e : terms-of-trade effect Tariff revenue from the exporting country

26 Net Welfare effect If e>b+d, domestic welfare If e

27 Nationally Optimal Tariff t*=1/Sm Sm: Price elasticity of foreign export supply curve

28 Nationally Optimal Tariff Beggar-thy-neighbor policy Tariff war

29 8.9 The Effective Rate of Protection Under free trade Domestic Value-added (V) V 0 = P f – P i f : imported finished product i : imported inputs

30 Under tariff protection V 1 = P f (1+t f ) – P i (1+t i ) If V 1 > V 0, Protection is effective. ERP = = a= P i / P f V 0 = P f – P i V 1 - V 0 V0V0 t f – at i 1- a

31 ERP and Tariff Structure Suppose Country A imports X, P f =20, P i =15, a=3/4,. If t f =10%,t i =0%; ERP=40%. If t f =10%,t i =10%; ERP=10%. If t f =10%,t i =20%; ERP=-20%.

32 ERP and Tariff Structure If t f > t i, ERP> t f. If t f = t i, ERP= t f = t i. If t f < t i, ERP< t f.

33 Summary Effects of import tariffs Small country Large country Effective rate of protection


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