TARIFFS

T YPES OF T ARIFFS 1. Ad valorem import tariff : a percentage of the value of the imported article Advantage: Tariff rises with inflation and is easy to implement because it taxes different qualities of products the same rate. Disadvantage: There is incentive to use a false invoice price to avoid part of the tariff If a miss leading low price is shown on the invoice, part of the tariff can be avoided. This is also called transfer pricing Example: A 10% tariff on cars may encourage both car exporters and their customers to invoice the car at $1000 below the true value. This would save $100 Issue: Some countries believe they are victims of false invoicing. How then to properly invoice a product?

T YPES OF T ARIFFS 2. Specific import tariff : A fixed charge for each unit of imported goods. Disadvantages: The level of protection declines in periods of inflation. Higher restrictive impact on lower priced goods within a product group. Ex: A $2 tariff on cheap wine imports would be prohibitive (they would not be imported) but have very little effect on importing behavior of expensive wine. If inflation raises the price of the import competing good then the specific tariff becomes less effective at restricting imports Relative prices between the domestic good and the import get closer together. Advantages: Avoid the false invoicing problem.

T YPES OF T ARIFFS 3. Compound Tariff: a combination of ad valorem and specific – 10% ad valorem + $0.20 per yard of cloth.

E FFECTIVE R ATE OF P ROTECTION 8-6 Copyright © 2006 Pearson Addison- Wesley. All rights reserved.

T ARIFF E XAMPLES BY C OUNTRY AND I NDUSTRY Data from World Trade Organization, World Trade Report 2007, Appendix