Tariffs

Tariffs - Chapter 8 Analysis of Tariffs and Other Barriers...

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Chapter 8- Analysis of Tariffs and Other Barriers to Free Trade In this chapter we will discuss: 1. Introduction to tariffs and other trade barriers 2. Analysis of a tariff in a "small" economy 3. Analysis of a tariff in a "large" economy 4. Analysis of a quantitative restriction-import quota- in a small economy. 5. Other non-tariff barriers, voluntary export restraints (VERs), local content requirements, government procurement policies, etc. 1. Introduction to tariffs and other trade barriers In the previous chapters, we presented a positive picture of the welfare enhancing effects of free trade. That is, if there are no
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market "failures", free international exchange of goods and services can potentially increase welfare for all trading partners. In reality though, very few countries or regions in the world practice free trade. Hong Kong is the only free trade port city in the world. Practically all other countries large and small impose some form of trade barrier --of varying strengths-- on their imports from other countries. Even countries who sign free trade pacts with their neighbors-- NAFTA for example or EU-- still maintain trade barriers against the rest of the world. Therefore, while there may be a relative state of free trade within a few particular regions of the world, we are certainly far away from state of free trade for the world as a whole (the prospects and future role of WTO, not withstanding). Countries employ a variety of tools for limiting free trade: from tariffs to import quotas to voluntary export restraint agreements, and all the way to invisible, sometimes strange methods of discouraging a foreign producer of a good from selling in their country. Quotas and the latter group of barriers to free trade are called non-tariff barriers or NTBs, in the language of GATT. In this chapter, we analyze the effects of imposing tariffs, import quotas, and briefly other non-tariff barriers. One important question is to consider why, with all the research including both analytical and empirical evidence pointing towards benefits of free trade, countries still hold on to their anti-free trade positions? 1 Specifically, why do so many countries still maintain the policy of import tariffs? The set of arguments in favor of tariffs produced by policy makers reads as follows: 1. Tariffs provide an important source of revenues for the government.
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2. The change of policy from limited to free trade hurts the income of particular groups within the economy (usually the scarce factor-- remember this argument from the H-O model?) and is an unacceptable policy choice. 3. There is a form of "market failure" in the form of an externality in the import competing industry. In other words, the positive externality of producing more of the good domestically outweighs the negative effects of a tariff imposed to protect domestic production. This is essentially a type of "infant industry" argument for protection of a domestic industry. 4. Tariffs are used as a "retaliatory" tool against tariffs imposed by a
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Tariffs - Chapter 8 Analysis of Tariffs and Other Barriers...

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