International Trade Policy
Trade Restrictions: Tariffs
Focuses on barriers to free trade
Tariffs
• Tariff – tax imposed on an imported/ exported of
a good or service that crosses a national
boundary.
• Import tariff- Imposed on imports
• Export tariff-Imposed on exports
• Types of tariffs
Ad valorem – % of value of import
Specific – fixed amt per physical unit.
Composite – combination of 1 and 2
Concept review
• Consumer surplus – is the difference between what
consumers pay and the value they receive. This is
because, given a downward-sloping demand curve that
shows what consumers will demand at different prices,
what consumers end up paying (market price) is
sometimes lower that what they were willing to pay. This
is the consumer surplus. It is given as the area beneath
the demand curve but above the market price.
• Producer surplus – is
the difference between the
prices at which producers are willing to supply
different quantities and the prices they actually
receive. The surplus arises because producers
are sometimes willing to supply at prices lower
than the market price. It is given by the area
between the market price and the supply curve.
Partial equilibrium analysis of a
tariff
Effects of a tariff:
• Consumption
• Production
• Trade
• Revenue
• Producer and
Consumer
surplus
Effects on producer and consumer
surplus
• An Decrease in CC and Increase in PC
Partial Equilibrium cost and
benefits
• Consumer and producer surplus used to measure costs and benefits
• Deadweight losses - Net loss to society
• Additional outlays for producers and loss to consumers from moving
to lower indifference curves
Rate of effective protection
• Nations often impose lower tariffs on raw materials/inputs than on
final commodities to encourage domestic processing and
employment.
• Appropriate measure of degree of protection is the effective rate of
protection (g)
• Formula for the effective rate of protection
•
g
=
t - ai t i
1- ai
Where g =
the rate of effective protection to producers of the final
commodity
t = nominal tariff rate on consumers of the final commodity
ai = ratio of cost of imported input to the price of the final commodity
without tariffs
ti = nominal tariff rate on the imported input
Tariff arguments
• Creates revenue for government
• Infant industry protection
• Dumping – of foreign goods at low prices to kill off
competition
• Cheap labour – protection from cheap foreign labour
• Strategic trade policy – ↑ national welfare at the cost of
other nations
• Externalities – protect industries from foreign competition
in order for them to capture benefits of R&D
Trade Policy
• Analyze the most common reasons for
countries to protect certain industries
• Discuss the mechanisms used to provide
protection
Introduction
• Since the end of WWII, average tariff rates around the
world have fallen substantially
• By 2001, average nominal rates were 4% in US, 5.1% in
Japan, 3.9% in EU
• However, all nations have higher levels of protection in
particular industries they deem “sensitive”
• In addition to tariffs and quotas, many countries provide
generous subsidies to some of their agricultural
producers, particularly among
developed nations
Main Arguments
behind Trade Barriers 1
• Labor: Protection must be used against
imports from countries where wages are
much lower
– Problem: Does not consider differences in
productivity between different workforces: as
productivity rises, so will wages
Main Arguments
behind Trade Barriers 2
• Infant industry: Developing countries have nascent industries that
must be protected against competition from
industrial countries
– Assumes: (1) market forces do not allow for the development of
a certain industry and (2) the industry has positive
externalities—spillover benefits (valuable linkages to other
industries or technologies)
– Problems: (1) may increase inefficiency and result in negative
linkage effects and (2) technological externalities are difficult to
measure—which industries should
be protected?
Main Arguments
behind Trade Barriers 3
• National security: Certain industries must
be protected in order to guard national
security (military security, cultural values)
– Problems: (1) Vital mineral resources, for
example, can be purchased cheaply abroad
during peacetime; and (2) how to assess the
effects of, say, U.S. television programs on
Canadian culture?
Main Arguments
behind Trade Barriers 4
• Retaliation: Another country´s trade
barriers must be countered with
trade barriers
– Problems: Although retaliation can provide an
incentive for trade negotiations, it can also
lead to escalating trade wars
Other arguments behind
Trade Barriers
• Dumping: occurs when an exporter sells a
product at a price below the one it charges
in its
home market