trade restriction tariffs
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InternationalInternational
EconomicsEconomicsTenth Edition
Trade Restrictions: Tariffs
Dominick Salvatore
John Wiley & Sons, Inc.
Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.
CHAPTER E I G H T
88
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In this chapter:
Introduction
Partial Equilibrium Analysis of a Tariff
The Theory of Tariff Structure
General Equilibrium Analysis of a Tariff in aSmall Country
General Equilibrium Analysis of a Tariff in a
Large CountryThe Optimum Tariff
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Introduction
While it is generally accepted that free trademaximizes world output and benefits allnations, most nations impose some
restrictions on the free flow of internationaltrade.
Trade policies are advocated by special
groups that stand to benefit from traderestrictions.
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Import vs. export tariffs
Animport tariffis a tax or duty levied onimported commodities. This is the most common form of tariff.
Anexport tariffis a tax on exported
commodities. Prohibited by the U.S. Constitution, butoccasionally practiced in developing countriesto generate government revenue.
Introduction
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Import vs. export tariffs
Ad valorem tariff
A fixed percentage on the value of thetraded commodity.
Introduction
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Import vs. export tariffs
Ad valorem tariff
Specific tariff
A fixed sum per physical unit of a tradedcommodity.
Introduction
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Import vs. export tariffs
Ad valorem tariff
Specific tariff
A compound tariff
A combination of an ad valorem andspecific tariff.
Introduction
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Tariffs have been sharply reduced since WorldWar II.
Tariffs average 5 percent or less on industrialproducts in developed nations, but are muchhigher in developing nations.
Introduction
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Partial Equilibrium Analysis of a Tariff
Resulting Effects of Tariff Consumption effect
Reduction in domestic consumption
Production effect
Expansion of domestic production
Trade effect
Decline in imports
Revenue effect
Revenue collected by the government
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Partial Equilibrium Analysis of a Tariff
Resulting Effects of Tariff
The more elastic the demand curve, thegreater the consumption effect.
The more elastic the domestic supply curve,the greater the production effect.
The more elastic the demand and domestic
supply curves, the greater the trade effect, andthe smaller the revenue effect.
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Partial Equilibrium Analysis of a Tariff
Resulting Effects of Tariff
Consumer surplusis the difference betweenwhat consumers would be willing to pay and
what they actually pay. Imposition of a tariff reduces consumer surplus.
Increase in producer surplus, or rent, is the
payment that need not be made in the long run toinduce domestic producers to supply additionalgoods with the tariff.
Also calledsubsidy effect of tariff.
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Partial Equilibrium Analysis of a Tariff
Resulting Effects of Tariff
Tariff redistributes income -
From domestic consumers (who pay higherprice for the commodity) to domestic producers(who receive the higher price)
From nations abundant factor (producingexports) to the scarce factor (producingimports).
This leads to inefficiencies, or protectioncosts(deadweight losses).
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FIGURE 8-1Partial Equilibrium Effects of a Tariff.
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FIGURE 8-2Effect of Tariff on Consumer and Producer Surplus.
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FIGURE 8-3Partial Equilibrium Costs and Benefits of a Tariff.
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The Theory of Tariff Structure
The Rate of Effective Protection
Indicates how much protection is actuallyprovided to domestic producer of import-
competing commodity.When a nation imposes a lower tariff onimported inputs than on the final commodityproduced with the inputs, therate of effectiveprotection exceeds the nominal tariff rate.
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The Theory of Tariff Structure
The Rate of Effective Protection Calculated as follows:
Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.
g=
t- aiti
1 - ai
g= rate of effective protection
t= nominal tariff rate on final commodityai= ratio of cost of imported input to price of final
commodity with no tariff
ti= nominal tariff rate on imported input
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The Theory of Tariff Structure
The Rate of Effective Protection Calculated as follows:
Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.
g =
t - aiti
1 - aiConclusions
If ai= 0, g= t
For given values of aiand t
i, gis larger the greater ist
For given values of tand ti, gis larger the greater isai The value of gis >, = or < t, as ti t
When aiti> t, the rate of effective protection is negative
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FIGURE 8-4Pre- and Post-Uruguay Round Cascading TariffStructure in Industrial Countries.
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General Equilibrium Analysis of a Tariff in aSmall Country
A small nation will not affect prices on the worldmarket when imposing a tariff.
Domestic price of importable commodity will rise
by the full amount of the tariff forindividualproducers and consumersin the small nation.
Price remains constant fornation as a wholebecause
the nation collects the tariff. Volume of trade for small nation declines, but termsof trade do not change, so welfare always falls.
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FIGURE 8-5General Equilibrium Effects of a Tariffin a Small Country.
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General Equilibrium Analysis of a Tariff in aSmall Country
Stolper-Samuelson Theorem
An increase in the relative price of acommodity (for example, as the result of a
tariff) raises the return of the factor usedintensively in production of the commodity.
Thus, the real return to the nations scarce
factor of production will rise with theimposition of a tariff.
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General Equilibrium Analysis of a Tariff in aLarge Country
A tariff causes the imposing nations offer curve toshift or rotate toward the axis measuring theimportable commodity by the amount of the tariff.
Under these circumstances, for a large nation: A reduction in trade volume will reduce welfare
An improvement in terms of trade will increase
welfare Whether welfare actually rises or falls depends onnet effect.
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FIGURE 8-6General Equilibrium Effects of a Tariffin a Large Country.
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The Optimum Tariff
Anoptimum tariffmaximizes the net benefit resultingfrom the improvement in the nations terms of tradeagainst the negative effect from declining trade volume.
As the terms of trade improve for the imposing nation,those of the trade partner deteriorate, reducing welfarefor the trade partner.
Trade partner will likely retaliate and impose its own
optimum tariffs. World as a whole is made worse off as gains fromoptimum tariff are less than losses of trade partner.
Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.