Import tariffs
Jan J. Michalek
Trade policy & tariffs
z
z
z
z
z
Trade policy: aiming at changing pattern and
volume of international trade.
Export, transit and import tariffs
Î Only import duties are applied;
Specific versus ad valorem duties;
Tariffs: the oldest & the most important
instrument of trade policy
International Trade & the World Economy; © Charles van Marrewijk
Tariffs, quota's, and other trade restrictions
There are many types of trade restrictions, e.g. specific tariffs, ad
valorem tariffs, quota, subsidies, prohibitions, minimum content, etc.
Remaining tariff as % of 1930 tariff
60
Multilateral rounds
by GATT/WTO
have reduced the
tariff levels
considerably
50
40
30
20
10
0
1945
1955
1965
1975
1985
1995
© Charles van Marrewijk & JJM
TRADE POLICY: TARIFFS
Introduction
Tariffs, quota's, and other trade restrictions
Tariffs and partial equilibrium
Tariffs and general equilibrium
Offer curves
General equilibrium with offer curves
The "optimal" tariff?
Optimal tariffs and retaliation
Tariffs in the USA
Infant industry protection
Conclusions
© JJ Michalek
Small country: Equilibrium under free
trade: partial equilibrium analysis
p
D
S
PA
PW
z
q0
0
q4
q
© JJ Michalek
Implications of tariff imposition:
small country perspective
p
D
S
PA
y
PW+t
t
PW
0
a
b
x
z
q0
z
q1
c
d
q3
q4
q
© JJ Michalek
Producer’s surplus
p
S
P2
C
b
P1
B
a
A
q1
0
q
q2
Price up Æ surplus incresed by area of b
© JJ Michalek
Consumer’s surplus
p
A
P2
a
B
b
P1
C
D
0
q1
q2
q
Price up (fom P1 to P2) Æ
Surplus down by area b
© JJ Michalek
Welfare changes: small
country
z
Welfare changes resulting from
imposition:
Producer’s surplus:
+a
Consumer’s surplus: - (a+b+c+d)
Fiscal revenues
:
+c
z
Î Changes in net welfare: - (b+d)
z
z
z
tariff
International Trade & the World Economy; © Charles van Marrewijk
Tariffs and partial equilibrium; large country
increase producer surplus
price
= net loss; possible gain
-/decrease consumer surplus
government revenue
supply
p2
p1(1+t)
a
c
b
p0
p1
tariff
d
e
imports with tariff
demand
imports without tariff
q0
q1
q2
q3
q4
quantity
Optimal duty: graphic
illustration
Fiscal revenues
from duties
Y max
Real income
Yaut
Rmax
Income from duties
0
topt
tr
tp
Level of duty
© JJ Michalek
Welfare changes: large
country
z
z
z
z
z
z
Welfare changes resulting from tariff imposition:
Producer’s surplus:
+a
Consumer’s surplus:
- (a+b+c+d)
Fiscal revenues
:
+c+e
Of which terms of trade effect:
+e
Î Changes in net welfare:
e-(b+d)
Offer curves: graphical
presentation
International Trade & the World Economy; © Charles van Marrewijk
General equilibrium with offer curves
3
import FoodA ; export Food B
Intersection
offer curves
gives trade
equilibrium
trade equilibrium
2
offerB
offerA
1
0
0
1
2
3
export Manufactures A ; import Manufactures B
International Trade & the World Economy; © Charles van Marrewijk
The ‘optimal’ tariff?
3
import FoodA ; export Food B
Imposing tariff rotates offer
curve, influences equilibrium
offerA tariff
offerA no tariff
offerB
C
2
D
1
0
0
1
2
export Manufactures A ; import Manufactures B
3
International Trade & the World Economy; © Charles van Marrewijk
The ‘optimal’ tariff?
Tangency of trade indifference
curve with foreign offer curve
determines ‘optimal’ tariff
Qt
F
R
R’
Q
R*
A
Ut*
Uf
Import F Æ
Consumption F
Æ
D
0T
Export M Æ
OC
Å Consumption M
© JJ Michalek
Import demand curve: MD
P
P
S
PA
P2
a
P1
c
b
D
S1
S2
D2
D1
MD
Q
D 2 -S 2
D 1 -S 1
Q
If p ric e ra is e s fro m P 1 to P 2 (e .g d u e to im p o rt d u ty)
C o n s u m p tio n fa lls fro m D 1 to D 2 & d o m e s tic p ro d u c tio n ra ise s fro m S 1 to S 2 ) = = >
P ric e P 1 --> d e m a n d fo r im p o rts M D = D 1 -S 1 ; & P ric e P 2 --> d e m a n d fo r im p o rts M D =
D 2 -S 2
Î a : p ro d u c tio n lo s s; b : c o n s u m p tio n lo s s ; c = a+ b : d e a d w e ig h t lo s s
© JJ Michalek
Export supply curve: XS
P
P
XS
*
S
P2
P1
P*A
D*
D*2 D*1 S*1 S*2
Q
S*1-D*1 S*2-D*2
Q
© JJ Michalek
Optimal tariff: illustration to
formal proof
p
MCm
SX
Pt
PF
P*t
DM
mt mF
m
© JJ Michalek
Optimal tariff: formal proof by
Helpman & Krugman
Optimal tariff rate: marginal cost of imports (MCm) which has to equate domestic price [p(m)].
So knowing that:
MCm = p* (m) + m[
⎡
⎤
⎢
⎥
⎡
⎡ 1⎤
1
dp* (m)
m dp* (m) ⎤
*
⋅
] = p* (m) ⋅ ⎢1 + *
⎥ = p (m)⎢1 + * ⎥
⎥ = p * (m) ⋅ ⎢1 +
*
dm
⎣ ζ ⎦
⎣ p (m) dm ⎦
⎢ dm : dp (m) * ⎥
m
p (m) ⎦⎥
⎣⎢
And domestic price after tariff (t) imposition is equal to:
p(m) = p* (m)(1 + t )
After some manipulations we get an optimal tariff formula:
topt =
1
ζ*
where : ζ∗ is the foreign elasticity of export supplies [i.e. (dm/m)/(dp*/p*)]
International Trade & the World Economy; © Charles van Marrewijk
CHAPTER 8; TRADE POLICY
Introduction
Tariffs, quota's, and other trade restrictions
Tariffs and partial equilibrium
Tariffs and general equilibrium
Chapter 8 tool: offer curves
General equilibrium with offer curves
The "optimal" tariff?
Optimal tariffs and retaliation
Tariffs in the USA
Conclusions
International Trade & the World Economy; © Charles van Marrewijk
Optimal 3tariffs and retaliation
import FoodA ; export FoodB
Tariff war leads to
bad outcome for all
offerA tariff
offerA no tariff
offerB no tariff
C
2
offerB tariff
D
E
1
F
0
0
1
2
3
export Manufactures A ; import Manufactures B
International Trade & the World Economy; © Charles van Marrewijk
CHAPTER 8; TRADE POLICY
Introduction
Tariffs
Tariffs and partial equilibrium
Tariffs and general equilibrium
Offer curves
General equilibrium with offer curves
The "optimal" tariff
Optimal tariffs and retaliation
Tariffs in the USA
Infant industry protection
Conclusions
© JJ Michalek
Infant industry protection
P
S
D
S'
PW+t
a
PW
b
O
d
c
t
e
q1
q2
q3
Q
International Trade & the World Economy; © Charles van Marrewijk
Tariffs in the USA
tariff revenue / import value
60
50
40
30
20
10
0
1820
tariff of
Abominations Morrill and
War tariffs
1870
Kennedy
FordneyMcCumby
Haw leySmoot
1920
1970
Unweighted world average tariff,
35 countries (in percent)
Tariff profile by income and
technology content
© JJ Michalek
Conclusions from tariff analysis
• There are many different types of trade restrictions
• Imposing tariffs leads to winners (some producers and the
government) and losers (other producers, consumers, and abroad)
• Net welfare is negative if the country is ‘small’ (efficiency loss,
Harberger triangles)
• Net welfare effect is potentially positive if the country is ‘large’
(= can influence the world relative price level; ‘optimal’ tariff)
• Net welfare effect also negative for large country with retaliation
•Infant industry protection: welfare can be (in principle) increased
•Market imperfections can provide weak argument for
protectionism (only second best policy)