Ch8_Tariffs

Ch8_Tariffs - TARIFFS 1 Overview • A tariff is a tax on...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: TARIFFS 1 Overview • A tariff is a tax on imports tariff Tariffs can be very large Sometimes they are called “customs duties” • Tariffs are referred to as “protection” because they raise prices of imports, and reduce competitive pressures on import-competing industries 2 Overview Questions • What are the different types of tariffs? • What happens to terms of trade when a country imposes a tariff? A small economy? A large economy? • What is the effective rate of protection? • What is the optimal tariff rate? 7 •1 Barriers to Trade • Countries often try to increase costs to importers and sometimes try to subside exporters • The general subject is called Barriers to Trade Import tariffs is one major part Non-tariff barriers to trade is another Import quotas “Voluntary” export restraints (VERs) Other inventive methods and tricks! 9 Preview of the Main Conclusions -1 • A tariff almost always lowers world well-being This means someone loses more than others gain • A tariff usually lowers the well-being of each country, including the one that imposes the tariff! • Whatever a tariff can do for the country, there is another policy that can do it better Almost always 10 Preview of the Main Conclusions -2 • There are exceptions to these rules: In the case of a “nationally optimal tariff” The tariff-imposing country may gain at the expense of other countries, under some conditions If there are incurable distortions, a tariff may be better than doing nothing A second-best policy For some international trade-specific distortions, a tariff may be the best policy 11 •2 Preview of the Main Conclusions -3 • A tariff absolutely helps groups closely tied to the production of import-substitutes Even if that tariff is bad for the country as a whole This is the key to understanding the current difficulties with barrier-reduction negotiations This applies to non-tariff trade barriers as well 12 Tariff Basics Basics • Tax on imports or exports ad valorem tariff: P = P0 (1+) specific tariff: P = P0 + 1994 (USITC 2690) MFN Non-MFN Sweet Potatoes 10% Microwave Ovens 4% 50% 35% Ballpoint Pens 0.8¢ each + 0.8% 6¢ each + 40% Chlorine Free 25% 13 Tariff Basics (cnt) cnt) • Tariff structures can be quite complicated Wristwatches with case of precious metal or metal clad with precious metal: with mechanical display only, having no jewels or only one jewel in the movement MFN: 51¢ each +6.25% on the case & strap, band or bracelet +5.3% on the battery Non-MFN: $2.25 each +45% on the case +80% on strap, band or bracelet +35% on the battery 14 14 •3 Tariff Basics (cnt) cnt) Tariff Rates in China, 1995 Oranges MFN NonMFN Wine 52% 100% 70% 180% Soft Drinks 75% 100% Chlorine Computers Cars 8% 80% 20% 70% 100% 230% 15 Tariff Basics (cnt) cnt) • Preferential duties tariff rates applied to an import according to its geographical source; a country that is given preferential treatment pays a lower tariff e.g., British Commonwealth, EU, NAFTA • GSP (generalized system of preferences) developed countries permit duty-free entry of a selected list of products if those products are imported from particular developing countries 16 Closed-Economy Equilibrium Price ($ per bike) 500 Sd Consumer Surplus 368.18 Dd 210 Producer Surplus 1.05 Quantity (millions of bikes) 17 •4 Closed-Economy Equilibrium • What are the: Producer surplus? Consumer surplus? 18 Free Trade Equilibrium (Small Economy) Sd 500 Gains from free trade 368.18 World price 300 Dd 210 0.6 1.05 1.6 21 Free-Trade Equilibrium • What are new: Producer surplus? Gain = Consumer surplus? Gain = Gains from trade? Gain = 22 •5 Equilibrium With a Tariff (Small Economy) Sd Tariff revenue A D 360 Tariff B E Price with tariff F G World price 300 C Dd 0.6 1.0 1.12 1.6 Losses from tariff 26 Equilibrium With Tariff • Producers gain: B • Consumers lose: B + E + F + G • Tariff revenue: F • Net Loss to the country: E + G Key thing is that the world price doesn’t change! 27 Equilibrium With Tariff • Production effect: E The loss from producing bicycles at higher marginal cost than necessary • Consumption effect: G The net consumer loss due to the higher price • They are both deadweight losses deadweight It means that no one benefits from these losses 28 •6 Equilibrium With Tariff • What are the new: Producer surplus? Gain = Consumer surplus? Gain = 29 Equilibrium With Tariff • What are the new: Tariff Revenue? Gains from trade? Net Gain = 32 32 Equilibrium With a Tariff (Small Economy) Sd Tariff revenue A D 360 Tariff B E Price with tariff F G World price 300 C Dd 0.6 1.0 1.12 Losses from tariff 1.6 36 36 •7 Demand and Supply Of Imports (Small Economy) Domestic Market International Market Import demand curve 360 300 0.6 1.0 1.12 1.6 0.12 1.0 37 Alternative Loss Calculation • The net loss can also be calculated from the triangle under the import demand curve: Import demand = 1.00 at P = $300 Import demand = 0.12 at P = $360 Net Gains from trade? Net Gain = 38 Effective Rate of Protection • Protection through tariffs is a complicated business Tariffs on the competing imports Tariffs on imported raw materials to the industry Value added of the industry all affect the effective rate of protection Definition: The percentage by which the entire set of trade barriers raises the industry’s value added per unit of output 41 41 •8 Effective Rate of Protection (cnt) cnt) • Note that this calculation does not take into does account changes to prices and output that may be caused by the tariff • Simplest case: Initial Price = $400, Tariff is 25%; all $400 is value added Price w/tariff = $400*(1+0.25) = $500 ERP = (500 – 400)/400 = 25% 42 Effective Rate of Protection (cnt) cnt) • Suppose that: Initial Price = $400; Tariff is 25% $200 imported raw matl; Tariff is 0% Value Added (VA) = $200 Price w/tariff = $400*(1+0.25) = $500 New Total value = $500 New VA = $300 ERP = (300 – 200)/200 = 50.00%! Tariff really protects just the value added 43 Effective Rate of Protection (cnt) cnt) • Suppose that: Initial Price = $400; Tariff is 25% $200 imported raw matl; Tariff is 10% $200 domestic raw materials; VA = $200 Price w/tariff = $400*(1+0.25) = $500 New Total value = $500 Import Value = $200*(1+0.10) = $220 New VA = $500 – $220 = $280 ERP = ($280 – 200)/200 = 40% 44 •9 Effective Rate of Protection (cnt) cnt) • Suppose that: Initial Price = $400; Tariff is 25% $200 imported raw matl; Tariff is 25% $200 domestic raw materials, VA = $200 Price w/tariff = $400*(1+0.25) = $500 New Total value = $500 Import Value = $200*(1+0.25) = $250 New VA = $500 – $250 = $250 ERP = ($250 – 200)/200 = 25% 45 Effective Rate of Protection (concl.) concl.) • The nominal rate is the tariff on the competing import • If tariffs on the industry’s inputs are lower than tariffs for its output, then the ERP exceeds the nominal rate • Exporters can be hurt by tariffs on their inputs It increases their costs 46 ERP Example • Suppose that: Raw Mat’l tariff = 5%, finished good tariff = 20% Initial Price = $1,000 $400 imported raw matl $600 domestic raw materials 47 •10 ERP Example • Suppose that: Raw Mat’l tariff = 5%, finished good tariff = 20% Initial Price = $1,000; $400 imported raw matl, $600 domestic raw materials, Initial VA = Price w/tariff = Import Value = New VA = ERP = 48 Equilibrium With Tariff (Large Economy) Sd Tariff revenue from imports Tariff (not to scale) Sd + SForeign A With Tariff D PWith Tariff Tariff B PFreeTrade F E C G H PWorld Price QDomestic - Sd + SForeign Dd QTariff = Losses from imposing the tariff 53 Equilibrium With Tariff; Large Economy Large • The welfare effects are found the same way from the new home price • Differences between a small and a large small large economy: The price at home rises by less than the tariff by Small economy: Phome = Pworld*(1+) Large economy: Phome = Pworld*(1+) BUT Pworld falls BUT Tariff revenue rises a little because imports are higher (lower price) In effect, foreigners pay part of the tariff! 54 •11 Optimal Tariff • Consumer and producer welfare effects are smaller Price doesn’t rise as much (ToT may improve) • Tariff revenues are larger Higher imports because price doesn’t rise as much • The less the price rises (the more the world price falls), the better the tariff policy looks The more the terms of trade improve • There is an optimal tariff that maximizes the optimal country’s welfare 55 Optimal Tariff • The world as a whole loses, and the rest of the world certainly does • The usefulness of an optimal tariff depends on the rest of the world not retaliating not • One of the reasons for multilateral trade negotiations 56 Optimal Tariff Example • The numerical example that follows uses the parameters of the earlier examples • It assumes that price changes that result from the tariff are equally shared between the home equally country and the rest of the world 57 •12 Optimal Tariff Example Tariff Cons Gain Prod Gain Tariff Rev 5.0% -$12.07 $4.81 $13.65 Total $6.39 10.0% -$24.27 $10.31 $24.27 $10.31 15.0% -$36.55 $16.57 $31.29 $11.31 25.0% -$61.22 $31.84 $31.84 $2.45 30.0% -$73.50 $41.11 $23.67 -$8.72 35.0% -$85.62 $51.68 $8.49 -$25.46 40.0% -$97.50 $63.75 $0.00 -$33.75 58 Summary: The Impact Of Tariffs • In small and large economies Reduces trade Reduces consumer surplus Increases producer surplus Increases government surplus 61 Summary: The Impact Of Tariffs • In a small economy: Net country welfare is reduced • In a large economy: Net country welfare can be increased if the terms of trade improve enough This welfare gain is at the expense of the partner economies all the economies together are worse off together 62 •13 The Effect of NAFTA 63 Welfare of Import Duty • A country has tariffs on its car imports and on its auto engine imports • The country produces cars using imported auto engines • Pressure to liberalize trade rises, and the country pledges to move toward freer trade • It eliminates the tariff on engine imports • Evaluate the country’s policy 64 THE END 65 •14 ...
View Full Document

This note was uploaded on 02/15/2011 for the course FBE 462 at USC.

Ask a homework question - tutors are online