8.1 The tariff concept 8.1.1 definition A tariff is a tax levied on a commodity when it crosses the boundary of a customs area. Import tariff, which is a tax levied on an imported product. Export tariff, which is a tax imposed on an exported product. 8.1.2 purposes Protective tariff is designed to insulate import-competing producers from foreign competition. Revenue tariff is imposed for the purpose of generating tax revenues and may be placed on both exports and imports.
8.1.3 Means of Collecting Tariffs specific tariff a fixed amount of money per physical unit of the imported product. ad valorem tariff a fixed percentage of the value of the imported product. compound tariff a combination of a specific and an ad valorem tariff. 8.2 Partial Equilibrium Analysis of a Tariff a small nation imposes a tariff on imports competing with the output of a small domestic industry. Then the tariff will affect neither world prices nor the rest of the economy.
8.2.1 Partial Equilibrium effects of a Tariff The Consumption effect of the tariff--- the reduction in domestic consumption = 20X (BN) The production effect--- the expansion of domestic production resulting from the tariff = 10X (CM) The trade effect --- the decline in imports = 30X (BN+CM) The Revenue effect --- the revenue collected by the government = $30 (MJHN) Substitution effect or protection effect
8.2.2 Effect of a Tariff on consumer and Producer Surplus consumer surplus is difference between what consumers would be willing to pay for each unit of the commodity and what they actually pay When Q <, or =D 0 Consumers would be willing to pay OD 0 FG Consumers actually pay OD 0 FA Without tariff So, consumer surplus is: AFG When tariff = t and P=P*+t Consumers would be willing to pay OD 1 EB. So, consumer surplus is: BEG The tariff reduce the consumer surplus AFG – BEG = AFEB=a+b+c+d Consumers actually pay OD 1 EB g
Producer surplus is the revenue producers receive over and above the minimum amount required to induce them to supply the goods (profit) The tariff increases producer surplus by area a Without tariff Producer’s revenue = a+b+e+f+g Producer’s cost = f Producer surplus = e When tariff = t g Producer’s revenue = e+f Producer’s cost = b+f+g Producer surplus = a+e
8.3 The degree of protection afforded by a tariff 8.3.1 Tariff Level Tariff Level = Amount of Import tariff / Amount of import x100% Tariff Level = ∑C / ∑P = ∑(PxR) / ∑P 8.3.2 Nominal Rate of Protection --- NRP NRP = (Pd – Pa) / Pa Pd: the price of a commodity in domestic market Pa : The price of a commodity in abroad market NRP = tariff rate of the final commodity = t (without considering the effect of exchange rate)
8.3.3 Effective Rate of Protection --- ERP ERP indicates how much protection is actually provided to the domestic processing of the import competing commodity ERP signifies the total increase in domestic productive activities (value added) that an existing tariff structure makes possible, compared with what would occur under free-trade conditions. ERP =(V’ – V) / V V’: value added in domestic productive activities V: value added in abroad, free trade conditions
ERP =(V’ – V) / V V’ = (P2 + C2) – (P1 + C1) P2: price of final product C2: amount of import duty of final product P1: price of input C1: amount of import duty of input V = P2 – P1 So, ERP = (P2 + C2) – (P1 + C1) – (P2 – P1) P2 – P1 =(C2 –C1) / (P2 – P1)
= ERP = (C2 –C1) / (P2 – P1) C2 P2 C1 P1 P2 X 1 – P1/P2 P1/P2 = ai the ratio of the cost of the imported input to the price of the final commodity in the absence of tariffs C2/P2 = t the nominal tariff rate on consumers of the final commodity C1/P1 = ti the nominal tariff rate on the imported input ERP = t – ai X ti 1 – ai
8.3.4 Varies of tariff rate Import Duty (Norma Tariff) a. Common duties Most – Favored – Nation Treatment b. Most – favoured Duties c. Preferential Duties d. Generalized System of Preferences (GSP) Import Surtax a. Anti – Dumping duty b. Anti – Subsidy duty c. Emergency Tariff d. Penalty Tariff e. Retaliatory Tariff