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International Economics By Robert J. Carbaugh 9th Edition

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1 International Economics By Robert J. Carbaugh 9th Edition
Chapter 5: Tariffs

2 Tariffs 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 Carbaugh, Chap. 5

3 Tariffs 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. 5

4 Types of tariff Specific tariff (从量税)
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. Carbaugh, Chap. 5

5 Ad valorem tariff (从价税)
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 (混合税) A combination of the above, often levied on finished goods whose components are also subject to tariff if imported separately Carbaugh, Chap. 5

6 Effective rate of protection
Tariffs 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. 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%. Carbaugh, Chap. 5

8 Effective rate of protection (cont’d)
Tariffs Effective rate of protection (cont’d) 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 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 Carbaugh, Chap. 5

10 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. Carbaugh, Chap. 5

11 Tariff welfare effects
Tariffs 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. 5

12 Consumer and producer surplus
Tariffs Consumer and producer surplus Carbaugh, Chap. 5

13 Basic Tariff Analysis 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 Carbaugh, Chap. 5

14 Tariff trade and welfare effects
Welfare effects of tariffs Tariff trade and welfare effects Carbaugh, Chap. 5

15 Tariff trade and welfare effects
Welfare effects of tariffs Tariff trade and welfare effects Carbaugh, Chap. 5

16 Who pays for import restrictions?
Tariff effects 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 Carbaugh, Chap. 5

17 Arguments for trade restrictions
Reasons for tariffs 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 Carbaugh, Chap. 5

18 Politics of protectionism
Reasons for tariffs 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 Carbaugh, Chap. 5

19 Politics of protectionism
Reasons for tariffs Politics of protectionism “Demand” for protectionism depends on: The amount of the import-competing industry’s comparative disadvantage The level of import penetration The level of concentration in the affected sector The degree of export dependence in the sector Carbaugh, Chap. 5


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