2 Chapter 8 Trade Restrictions: Tariff Barriers 8.1 The tariff concept8.1.1 definitionA 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 purposesProtective tariffis designed to insulate import-competing producers from foreign competition.Revenue tariffis imposed for the purpose of generating tax revenues and may be placed on both exports and imports.
3 8.1.3 Means of Collecting Tariffs specific tariffa fixed amount of money per physical unit of the imported product.ad valorem tariffa fixed percentage of the value of the imported product.compound tariffa combination of a specific and an ad valorem tariff.8.2 Partial Equilibrium Analysis of a Tariffa 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.
4 8.2.1 Partial Equilibrium effects of a Tariff The trade effect--- the decline in imports = 30X (BN+CM)The Revenue effect--- the revenue collected by the government = $30 (MJHN)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)Substitution effect or protection effect
5 8.2.2 Effect of a Tariff on consumer and Producer Surplus consumer surplusis difference between what consumers would be willing to pay for each unit of the commodity and what they actually paygWithout tariffWhen Q <, or =D0Consumers would be willing to pay OD0FGConsumers actually pay OD0FASo, consumer surplus is: AFGWhen tariff = t and P=P*+tConsumers would be willing to pay OD1EB.Consumers actually pay OD1EBSo, consumer surplus is: BEGThe tariff reduce the consumer surplus AFG – BEG = AFEB=a+b+c+d
6 Producer’s revenue = e+f Producer surplusis the revenue producers receive over and above the minimum amount required to induce them to supply the goods (profit)gWithout tariffProducer’s revenue = e+fProducer’s cost = fProducer surplus = eProducer’s cost = b+f+gWhen tariff = tProducer’s revenue = a+b+e+f+gProducer surplus = a+eThe tariff increases producer surplus by area a
7 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) / ∑P8.3.2 Nominal Rate of Protection --- NRPNRP = (Pd – Pa) / PaPd: the price of a commodity in domestic marketPa : The price of a commodity in abroad marketNRP = tariff rate of the final commodity = t(without considering the effect of exchange rate)
8 8.3.3 Effective Rate of Protection --- ERP ERP indicates how much protection is actually provided to the domestic processing of the import competing commodityERP 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) / VV’: value added in domestic productive activitiesV: value added in abroad, free trade conditions
9 ERP =(V’ – V) / VV’ = (P2 + C2) – (P1 + C1)P2: price of final productC2: amount of import duty of final productP1: price of inputC1: amount of import duty of inputV = P2 – P1(P2 + C2) – (P1 + C1) – (P2 – P1)So, ERP =P2 – P1=(C2 –C1) / (P2 – P1)=(C2 –C1) / (P2 – P1)
10 the nominal tariff rate on the imported input ERP = (C2 –C1) / (P2 – P1)C2P2C1P1X1 – P1/P2=the ratio of the cost of the imported input to the price of the final commodity in the absence of tariffsP1/P2 = aiC2/P2 = tthe nominal tariff rate on consumers of the final commodityC1/P1 = tithe nominal tariff rate on the imported inputERP =t – ai X ti1 – ai
11 Import Duty (Norma Tariff) Varies of tariff rateImport Duty (Norma Tariff)a. Common dutiesb. Most – favoured DutiesMost – Favored – Nation Treatmentc. Preferential Dutiesd. Generalized System of Preferences (GSP)Import Surtaxa. Anti – Dumping dutyd. Penalty Tariffb. Anti – Subsidy dutye. Retaliatory Tariffc. Emergency Tariff