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 (usually import-competing
industries and scarce factors)
Carbaugh, Chap. 4
1
Tariffs
Defining tariffs
 A tariff is a tax (duty) levied on products (final
goods, intermediates or raw materials) 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. 4
2
Tariffs
Types of tariff
 Specific tariff – a fixed monetary fee per unit.
 Ad valorem tariff
 A percentage of the value of the product (like a
sales tax) - FOB vs. CIF
 Compound tariff
 A combination of the above, often levied on
finished goods whose components are also
subject to tariff if imported separately
Carbaugh, Chap. 4
3
Tariffs
Selected US tariffs
Product
Duty Rate
Brooms
32 cents each
Fishing reels
24 cents each
Wrist watches (without
jewels)
29 cents each
Ball bearings
2.4% ad valorem
Electrical motors
6.7% ad valorem
Bicycles
5.5% ad valorem
Wool blankets
1.8 cents/kg + 6% ad valorem
Electricity meters
16 cents each + 1.5% ad valorem
Auto transmission shafts
25 cents each + 3.9% ad valorem
Source: U.S. International Trade Commission, Tariff Schedules of the United States (Washington, DC: U.S. Government
Printing Office, 2004); http://www.usitc.gov/t affairs.htm.
Carbaugh, Chap. 4
4
Tariffs
Effective rate of protection
 The impact of a tariff often differs from its stated
nominal tariff rate
 The effective tariff rate measures the total
increase in domestic production that the tariff
makes possible, compared to free trade
 Measures the degree to which domestic producers can
be less efficient compared to foreign producers.
 Domestic producers may use imported inputs
which are subject to tariffs, so calculation of the
effective tariff rate is not simple
Carbaugh, Chap. 4
5
Effective rate of protection
 te = (tnom – ti*a)/(1 – a)
 a = value imports/value final good
 ti = tariff rate on imported inputs
 te = Dvalue added/(original value added)
 The higher ti (tariff on imported inputs), the
lower the effective tariff since domestic
producers pay more for their inputs.
 If imported inputs have low duties and final
goods have high duties then the effective tariff
rate is high; called tariff escalation.
Carbaugh, Chap. 4
6
Example
 Free trade price $100, inputs $80; ti = 0%.
 Free Trade: Domestic
Foreign
Components $ 80
$ 80
Value added $ 20
$ 20
Price
$100
$100
Carbaugh, Chap. 4
7
 Ad valorem final good tariff = 10%; Price = $110
 Tariff:
Domestic
Foreign
Components
$ 80
$ 80
Value added
$ 30
$ 20
Tariff
------$ 10
Price
$110
$110
te = Dvalue added/value added = ($30 - $20)/$20 =
0.5 or 50% effective tariff rate.
te = (tnom – ti*a)/(1 – a) = {0.1 – (0)*(0.80)}/(1 – 0.80)
= 0.1/0.2 = 0.5 = 50% effective tariff rate.
Carbaugh, Chap. 4
8
 Tariff on inputs: ti = 10%
 Tariff:
Domestic
Foreign
Components
$ 88
$ 80
Value added
$ 22
$ 20
Tariff
------$ 10
Price
$110
$110
te = Dvalue added/value added = ($22 - $20)/$20 =
0.1 or 10% effective tariff rate.
te = (tnom – ti*a)/(1 – a) = {0.1 – (0.10)*(0.80)}/(1 –
0.80) = 0.02/0.2 = 0.10 = 10% effective tariff rate.
Carbaugh, Chap. 4
9
Tariffs
Nominal & effective tariff rates
Product
United States
Japan
European Union
Nominal
rate (%)
Effective
rate (%)
Nominal
rate (%)
Effective
rate (%)
Nominal
rate (%)
Effective
rate (%)
1.8%
1.9%
18.4%
21.4%
4.8%
4.1%
Food, beverages,
tobacco
4.7
10.6
25.4
50.3
10.1
17.8
Textiles
9.2
18.0
3.3
2.4
7.2
8.8
Wearing apparel
22.7
43.3
13.8
42.2
13.4
19.3
Leather products
4.2
5.0
3.0
–14.8
2.0
–2.2
Footwear
8.8
15.4
15.7
50.0
11.6
20.1
Wood products
1.6
1.7
0.3
–30.6
2.5
1.7
Furniture and fixtures
4.1
5.5
5.1
10.3
5.6
11.3
Paper and paper
products
0.2
-0.9
2.1
1.8
5.4
8.3
Printing and publishing
0.7
0.9
0.1
–1.5
2.1
-1.0
Agriculture, forestry, fish
*Following the completion of the Tokyo Round of Multilateral Trade Negotiations in 1979.
Source: Alan Deardorff and Robert Stern, “The Effects of the Tokyo Round on the Structure of Protection,” in R. Baldwin and A. Krueger, The
Structure and Evolution of Recent U.S. Trade Policy (Chicago: University of Chicago Press, 1984), 368–377.
Carbaugh, Chap. 4
10
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 the economy suffers DWL due to
production and consumption effects
 Export industries face higher costs for inputs
 Cost of living increases
 Other nations may retaliate, further
restricting trade
Carbaugh, Chap. 4
11
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. 4
12
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 importcompeting industries
 Magnitude of the adjustment costs from free
trade
 Public sympathy for those sectors hurt by free
trade
Carbaugh, Chap. 4
13
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. 4
14
Types of non-tariff barriers
Import quotas
 Quotas are a restriction on the quantity of a
good that may be imported in any one
period (usually below free-trade levels)
 Global quotas restrict the total quantity of
an import, regardless of origin
 Selective quotas restrict the quantity of a
good coming from a particular country
Carbaugh, Chap. 4
15
Types of non-tariff barriers
Tariff-rate quota
 The tariff-rate quota is a two-tiered tariff
 A specified number of goods (up to the quota
limit) may be imported at one (lower) tariff rate,
while imports in excess of the quota face a
higher tariff rate
Carbaugh, Chap. 4
16
Types of non-tariff barriers
Domestic content requirements
 Rules that require a certain percentage of a
product’s total value to be produced
domestically
 Often has the effect of forcing lower-priced
imports to include higher-cost domestic
components or be assembled in a highercost domestic market
Carbaugh, Chap. 4
17
Types of non-tariff barriers
Domestic content: trade & welfare effects
Carbaugh, Chap. 4
18
Types of non-tariff barriers
Subsidies
 Domestic subsidy
 Payments made to import-competing
producers to raise the price they receive above
the market price
 Export subsidy
 Payments and incentives offered to export
producers intended to raise the volume of
exports
Carbaugh, Chap. 4
19
Types of non-tariff barriers
Dumping
 The practice of selling a product at a lower
price in export markets than at home (or
exporting at prices below production cost)
 Sporadic dumping - to clear unwanted
inventories or cope with excess capacity
 Predatory dumping - to undermine foreign
competitors
 Persistent dumping - reaping greater profits by
engaging in price discrimination
Carbaugh, Chap. 4
20
Types of non-tariff barriers
Other NTBs
 Government procurement policies
 Social regulations (health, environmental
and safety rules can also restrict trade)
 Sea transport and freight restrictions
Carbaugh, Chap. 4
21
Case for Free Trade
 Not based on claim that everyone is better
off with free trade
 Modern case against free trade is based
on:
 The infant industry argument,
 The terms of trade argument,
 Arguments concerning income redistribution
Carbaugh, Chap. 4
22
Case for Free Trade
 Consumption Efficiency
 Production Efficiency
 Compensation Principle: TAA for displaced
workers
 Introduces competition into imperfectly
competitive markets
 Helps country avoid tit-for-tat retaliation
 Reduces interest group lobbying
Carbaugh, Chap. 4
23
Case Against Selected Protectionism
 1) Potential reactions by others in response
to a country's protection,
 2) Superior policies to raise economic
efficiency relative to a trade policy,
 3) Information deficiencies which can inhibit
the implementation of appropriate policies,
 4) Problems created by lobbying within
democratic political systems.
Carbaugh, Chap. 4
24