1. International Economics By Robert J. Carbaugh 10th Edition
Chapter 4:
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 (usually import-competing industries
Carbaugh, Chap. 4

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. 4

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 (much like a sales tax)
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

5. Selected US tariffs 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);
Carbaugh, Chap. 4

6. 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. 4

7. 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. 4

8. Nominal & effective tariff rates
Tariffs
Nominal & effective tariff rates
Product
United States
Japan
European Union
Nominal rate (%)
Effective rate (%)
Agriculture, forestry, fish
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
15.4
15.7
50.0
11.6
20.1
Wood products
1.6
1.7
0.3
–30.6
2.5
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
-1.0
*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

9. Tariff welfare effects
A small country case
Price taker
A large country case
Influence on world price
Carbaugh, Chap. 4

10. 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. 4

11. Consumer and producer surplus
Tariffs
Consumer and producer surplus
Carbaugh, Chap. 4

12. Tariff trade and welfare effects (small country case)
Has no influence over world price
Tariff increases => price increases => supply curve shifts
Carbaugh, Chap. 4

13. Tariff trade and welfare effects
Welfare effects of tariffs
Tariff trade and welfare effects
Carbaugh, Chap. 4

14. Redistribution effect Protective effect Consumption effect
Carbaugh, Chap. 4

15. Results of Tariff Small country case
Tariff entirely falls on consumers
Nation’s welfare decreases because of deadweight loss
Carbaugh, Chap. 4

16. Tariff on welfare Large country case
Has influence on world price
Carbaugh, Chap. 4

17. Tariff trade and welfare effects
Welfare effects of tariffs
Tariff trade and welfare effects
Carbaugh, Chap. 4

18. Results of Tariff Large country case
Redistribution effect
Protective effect
Revenue effect
Consumption effect
Carbaugh, Chap. 4

19. Results of Tariff (large country case)(cont’d)
Deadweight loss
Domestic consumers pay the bill, well… partially
Foreign producers pay another share of the bill
National welfare,… depends
Carbaugh, Chap. 4

20. Policy Implication
U.S. could increase tariff to a certain level: Optimum tariff
However, we should be careful…
Carbaugh, Chap. 4

21. Other impacts of Tariff
Export industries face higher costs for inputs
Cost of living increases
Other nations may retaliate, further restricting trade
Carbaugh, Chap. 4

22. Other impacts of tariff (cont’d)
Poor people in U.S. more likely pay the price
Young single mothers purchasing at Wal-Mart pay tariff rates 5 to 10 times higher than rich families purchasing at luxury stores.
Job protection costs 1 million dollars to save one steel worker’s job (1986).
Carbaugh, Chap. 4

23. ONE MILLION DOLLARS!
Carbaugh, Chap. 4