1. International Economics By Robert J. Carbaugh 9th Edition
Chapter 5:
Tariffs

2. 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
Carbaugh, Chap. 5

3. Tariffs
Defining tariffs
A tariff is a tax (duty) levied on products 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. 5

4. Types of tariff Specific tariff Ad valorem tariff Compound tariff
Fixed monetary fee per unit of the product
Ad valorem tariff
Levied as a percentage of the value of the product
Compound tariff
A combination of the above, often levied on finished goods whose components are also subject to tariff if imported separately
Carbaugh, Chap. 5

5. Effective rate of protection
Tariffs
Effective rate of protection
The impact of a tariff is often different from its stated amount
The effective tariff rate measures the total increase in domestic production that the tariff makes possible, compared to free trade
Domestic producers may use imported inputs or intermediate goods subject to various tariffs, which affects the calculation
Carbaugh, Chap. 5

6. Effective rate of protection (cont’d)
Tariffs
Effective rate of protection (cont’d)
When tariff rates are low on raw materials and components, but high on finished goods, the effective tariff rate on finished goods is actually much higher than it appears from the nominal rate
This is referred to as tariff escalation
Carbaugh, Chap. 5

7. Avoiding and postponing tariffs (US)
Production sharing and special treatment for foreign assembly using domestic components
Bonded warehouses
Foreign trade zones
Carbaugh, Chap. 5

8. Tariff welfare effects
Tariffs
Tariff welfare effects
Consumer surplus
The difference between the price buyers would be willing to pay and what they actually pay
Producer surplus
The revenue producers receive above the minimum amount required to induce them to produce a good
Carbaugh, Chap. 5

9. Consumer and producer surplus
Tariffs
Consumer and producer surplus
Carbaugh, Chap. 5

10. Tariff trade and welfare effects
Welfare effects of tariffs
Tariff trade and welfare effects
Carbaugh, Chap. 5

11. Tariff trade and welfare effects
Welfare effects of tariffs
Tariff trade and welfare effects
Carbaugh, Chap. 5

12. Who pays for import restrictions?
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 net loss for the economy (deadweight loss)
Export industries face higher costs for inputs
Cost of living increases
Other nations may retaliate, further restricting trade
Carbaugh, Chap. 5

13. Arguments for trade restrictions
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. 5

14. Politics of protectionism
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 import-competing industries
Magnitude of the adjustment costs from free trade
Public sympathy for those sectors hurt by free trade
Carbaugh, Chap. 5

15. Politics of protectionism
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. 5