1. Chapter 7: The Basic Analysis of a Tariff
Introduction to trade policy - why may countries wish to limit trade - protectionism
Tariff barriers
Non-tariff barriers (NTBs)
Tariffs are no longer the most important instrument, but they still exist
Specific tariffs
Ad-valorem tariffs

2. Effects of Tariffs
Tariffs may be used to limit imports and protect domestic producers
Producers will generally benefit, and consumers will lose, but tariffs usually will reduce welfare overall
Assume a small country can import all it wants at the world price (Pw)
Free trade price: PW
Price with a tariff: PW + t

3. Effects of Tariffs Domestic production with free trade: S1
Domestic consumption with free trade: D1
Imports: S1 - D1
With a tariff, domestic production increases to S2 and consumption decreases to D2
Imports: S2 - D2

4. Consumer Surplus
There will be a reduction in consumer surplus as a lower quantity is consumed and prices have increased

5. Producers surplus
Domestic producers will gain as output is expanded and prices are higher

6. Effects of Tariffs Consumers lose a + b + c + d Producers gain a
Tariff revenue c
Deadweight loss b + d
Modul 3

7. Effects of Tariffs

8. Tariffs – textboox example

9. Tariffs in a large country
A large country may enjoy monopsony power and force the exporting country to lower prices
Terms of trade gain from tariffs - the optimal tariff argument

10. The optimum tariff

11. Effective rate of protection
Even though nominal tariff rates have been decreased and are low, the protection effect may still be large
Very often a nation imports raw materials duty free or imposes a lower tariff rate than on the importation of the final commodity produced with the imported input

12. Effective rate of protection
When this is the case, the effective rate of protection - calculated on the domestic value added - exceeds the nominal tariff
The nominal tariff rate is important to consumers because it shows how much the prices increase, the effective tariff rate is important to producers because it indicates how much protection is actually provided to the domestic processing of the import competing commodity

13. Effective rate of protection
Assume that kr 80 of imported coffee beans goes into the domestic processing of coffee
Suppose also that the free trade price of coffee is kr 100, but that the nation imposes a 10 % tariff - raising the price to kr 110.
Of this, kr 80 represents imported coffee beans and kr 20 is domestic value added, and kr 10 is the tariff

14. Effective rate of protection
The nominal tariff rate is 10 %, but this corresponds to a 50 % effective tariff rate because the effective tariff is calculated on the value added domestically (10/20 = 50 %)
An effective tariff rate of 50 % enables domestic produces to increase domestic value added with 50 % - from 20 to 30

15. Effective rate of protection
The rate of effective protection is usually calculated on the following formula, where
g = rate of effective protection
t = nominal tariff on final commodity
ai = ratio of cost of imported input to the final commodity in the absence of tariffs
ti = nominal tariff on the imported input