Tariffs © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in...

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Tariffs

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐

PowerPoint slides prepared by:Andreea ChiritescuEastern Illinois University


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The Tariff Concept• Tariff• A tax (duty) levied on a product when it crosses

national boundaries• Import tariff• Tax levied on an imported product

• Export tariff• Tax imposed on an exported product• Often used by developing nations• Raise revenue, increase the world price


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The Tariff Concept• Protective tariff• To reduce the amount of imports entering a

country• Insulating import-competing producers from

foreign competition• Allows an increase in the output of import-

competing producers

• Revenue tariff• To generate tax revenues• Placed on either exports or imports


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Tariff revenues as a percentage of government revenues, 2007: selected countries

TABLE 4.1

Developing Countries Percentage Industrial Countries Percentage

The BahamasGuineaEthiopiaGhanaSierra LeoneMadagascarDominican RepublicJordan

51.247.933.528.527.626.920.911.3

New ZealandAustraliaJapanCanadaSwitzerlandUnited StatesUnited KingdomIceland

2.62.51.21.21.21.11.01.0


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Types of Tariffs• Specific tariff• Fixed amount of money per physical unit of the

imported product• Relatively easy to apply and administer• Degree of protection it affords domestic

producers varies inversely with changes in import prices• Provides domestic producers more protection

during a business recession


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Types of Tariffs• Ad valorem (of value) tariff• Fixed percentage of the value of the imported

product• Distinguish among small differentials in product

quality• Tends to maintain a constant degree of

protection for domestic producers


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Types of Tariffs• Ad valorem (of value) tariff• Customs valuation problems• Estimations by customs appraisers• FOB vs. CIF valuation• Free-on-board valuation• Cost-insurance-freight valuation• Includes transportation costs


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Types of Tariffs• Compound tariff• Combination of specific and ad valorem tariffs• For manufactured products • Embodying raw materials that are subject to tariffs

• Specific tariff• Neutralizes the cost disadvantage of domestic

manufacturers - from tariff protection granted to domestic suppliers of raw materials

• Ad valorem tariff• Protects the finished-goods industry


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Selected U.S. tariffsTABLE 4.2


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Examples of tariffs, selected countries (in %)TABLE 4.3


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Effective Rate of Protection• Nominal tariff rate • Published in the country’s tariff schedule• Applies to the value of a finished product that

is imported into a country• Effective tariff rate • Takes into account the nominal tariff rate• On a finished product

• And any tariff rate applied to imported inputs • Used in producing the finished product


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The effective rate of protectionTABLE 4.4


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Effective Rate of Protection• Effective tariff rate, e

• e = The effective rate of protection• n = the nominal tariff rate on the final product• a = the ratio of the value of the imported input to

the value of the finished product• b = the nominal tariff rate on the imported input

1

n abe

a


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Effective Rate of Protection• If the tariff on the finished product • Exceeds the tariff on the imported input• Effective rate of protection exceeds the

nominal tariff


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Effective Rate of Protection• If the tariff on the finished product• Is less than the tariff on the imported input• Effective rate of protection is less than the

nominal tariff• May even be negative

• Protects domestic suppliers of raw materials more than domestic manufacturers


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China’s nominal and effective tariff rates in forestry products, 2001

TABLE 4.5


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Tariff Escalation• Tariff escalation• Raw materials are often imported at zero or

low tariff rates• The nominal and effective protection increases

at each stage of production• Processed goods• Higher import tariffs


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Tariffs often rise significantly with the level of processing (tariff escalation) in many industrial countries. This is especially true for agricultural products. Tariff escalation in industrial countries has the potential of reducing demand for processed imports from developing countries, hampering diversification into higher-value added exports.

Tariff escalation on industrial countries’ imports from developing countries

FIGURE 4.1


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Outsourcing and Offshore-Assembly Provision

• Outsourcing • Certain aspects of a product’s manufacture are

performed in more than one country• Improvements in cost competitiveness• Penetrate foreign markets • High tariffs or other trade barriers restrict the direct

export of finished goods• Unique foreign production technologies, labor

skills, raw materials, or specialized components


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Outsourcing and Offshore-Assembly Provision

• Offshore-assembly provision (OAP) • Favorable treatment to products assembled

abroad from U.S.-manufactured components• Cost of the U.S. component - not included in the

dutiable value of the imported assembled article• Incentives for foreign manufacturers to

purchase components from U.S. sources• Generates sales and jobs in the U.S. component

industries


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Dodging Import Tariffs: Tariff Avoidance and Tariff Evasion

• Tariff avoidance• Legal utilization of the tariff system to one’s

own advantage• To reduce the amount of tariff that is payable

by means that are within the law• Tariff evasion • Individuals or firms evade tariffs by illegal

means


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• Ford Motor Company • Ships its Transit Connect five-passenger wagons• From its factory in Turkey to Baltimore, MD• Wagons: 2.5% tariff (duty of $625)

• Stripped and converted into cargo vanns• Cargo vans tariff: 25% (duty of $6,250)

• Completely legal


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• Smuggled steel evades U.S. tariff• Falsely reclassify steel as a duty-free product• Detach markings which indicate that the steel

came from a country subject to tariffs• Make it appear to have come from one that is

exempt• Alter the chemical composition of a steel

product enough so that it can be labeled duty-free


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Postponing Import Tariffs• Bonded warehouse • Dutiable imports can be brought into the U.S.

and temporarily left in a bonded warehouse, duty-free• Imported goods - stored, repacked, or further

processed - for up to five years• No customs duties are owed until the goods are

withdrawn for domestic consumption


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Postponing Import Tariffs• Foreign-trade zone (FTZ)• An area within the U.S. • Business can operate without the responsibility of

paying customs duties on imported products or materials • For as long as they remain within this area• And do not enter the U.S. marketplace

• Customs duties are due when goods are transferred from the FTZ for U.S. consumption


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Postponing Import Tariffs• Foreign-trade zone (FTZ)• No time limit on how long goods can be stored• General-purpose zones • Public facilities• Used by more than one firm

• Subzones • A single firm’s site • Used for more extensive manufacturing or

assembly


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Tariff Effects: An Overview• Tariff effects• Higher price of imports• Lower demand for imports• Domestic suppliers expand output• Benefits • Domestic producers


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Tariff Effects: An Overview• Tariff - imposes costs to domestic economy

• Buyers will pay more for their protected U.S.-made goods than they would have for the imported goods under free trade• Jobs will be lost at retail and shipping companies

that import foreign-made goods• Jobs will be lost in any domestic industries that

suffer from retaliatory tariffs• The extra cost of the goods gets passed on to

whatever products and services that use these goods in the production process


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Tariff Welfare Effects• Consumer surplus • The difference between the amount that

buyers would be willing and able to pay for a good and the actual amount they do pay• Affected by the market price• A decrease in the market price• Increase in the quantity purchased• Larger consumer surplus

• A higher market price• Reduce the amount purchased• Shrink the consumer surplus


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Tariff Welfare Effects• Producer surplus• Revenue producers receive over and above the

minimum amount required to induce them to supply a good• Affected by the market price• A higher market price• Increase in quantity supplied• Higher surplus

• A lower market price• Lower surplus


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Consumer surplus is the difference between the maximum amount buyers are willing to pay for a given quantity of a good and the amount actually paid. Graphically, consumer surplus is represented by the area under the demand curve and above the good’s market price. Producer surplus is the revenue producers receive over and above the minimum necessary for production. Graphically, producer surplus is the area above the supply curve and below the good’s market price.

Consumer surplus and producer surplusFIGURE 4.2


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Tariff Welfare Effects: Small-Nation Model

• Small nation• Its imports - a very small portion of the world

market supply• Price taker • Tariff effects• Raises the home price of imports by the full

amount of the duty• Higher domestic production• Lower domestic consumption


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• Small nation - Tariff effects on nation’s welfare• Consumer surplus falls• Welfare effects of a tariff• Revenue effect• Redistribution effect• Protective effect• Consumption effect

• Additional tax revenue• Benefits domestic producers• Wastes resources• Harms the domestic consumer


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For a small nation, a tariff placed on an imported product is shifted totally to the domestic consumer via a higher product price. Consumer surplus falls as a result of the price increase. The small nation’s welfare decreases by an amount equal to the protective effect and consumption effect, the so-called deadweight losses due to a tariff.

Tariff trade and welfare effects: small nation modelFIGURE 4.3


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• Revenue effect • The government’s collections of duty• Number of imports times the tariff• Portion of the loss in consumer surplus• Transferred to the government

• Does not result in an overall welfare loss


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• Redistribution effect• Transfer of the consumer surplus• To the domestic producers of the import-competing

product• Transfer of income from consumers to

producers• Does not result in an overall loss of welfare for

the economy


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• Protective effect• Loss to the domestic economy • From wasted resources used to produce additional

goods at increasing unit costs• Less efficient domestic production is

substituted for more efficient foreign production• Loss of welfare


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• Consumption effect• Residual not accounted for elsewhere• Loss of welfare occurs • Increased price• Lower consumption

• Deadweight loss of the tariff • Protective effect• Consumption effect


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GLOBALIZATIONTrade protectionism intensifies as global

economy falls into recession

• Global economic downturns - catalyst for trade protectionism; 2007–2009,• Decrease in the demand for goods and services• Decline in international trade

• Credit crunch - extra squeeze on trade• Shortfall of some $100 billion in trade finance –

90% of world trade


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• Indiscriminate decrease in trade• Exports declined by 30 % • China - targeted by the most governments for

protectionist measures• Russia • Increased tariffs on imported automobiles

• India • Raised tariffs on steel imports

• Argentina • New obstacles to imported auto parts and shoes


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Creeping protectionism during global economic downturn of 2008–2009: number of protectionist measures initiated*

TABLE 4.6


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• United States, steel industry• Increased tariffs• $100 billion U.S. steel market• Not protected by the “Buy American ” legislation

• Fiscal stimulus program• Shut out foreign companies from U.S. government

contracts (25% of new steel orders in 2009)


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• United States, tires• Tariffs of 25-35% on imports from China • For the next three years• Priced out of the market 17% of all tires sold in the

United States• Forced up the market price for consumers


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• Once trade barriers are increased• Can severely damage global supply chains• It can take years of negotiation to dismantle

trade barriers• It can take years before global supply chains

can be restored


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Tariff Welfare Effects: Large-Nation Model

• Large-nation • An importing nation large enough • Changes in the quantity of its imports• By means of tariff policy• Influence the world price of the product

• United States• Autos, steel, oil, and consumer electronics

• Japan• European Union


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• United States - tariff on automobile imports• Prices increase for American consumers• Decrease in the quantity demanded• If significant enough - force Japanese firms to

reduce the prices of their exports


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Effects of increases in U.S. tariffs on the world price of imported goods

TABLE 4.7


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• Economic effects of an import tariff• Redistributive effect• From domestic consumers to domestic producers

• Deadweight loss• Consumption effect• Protective effect

• Revenue effect• Domestic revenue effect• Terms-of-trade effect


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For a large nation, a tariff on an imported product may be partially shifted to the domestic consumer via a higher product price and partially absorbed by the foreign exporter via a lower export price. The extent by which a tariff is absorbed by the foreign exporter constitutes a welfare gain for the home country. This gain offsets some (all) of the deadweight welfare losses due to the tariff’s consumption and protective effects.

Tariff trade and welfare effects: large nation modelFIGURE 4.4


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• In figure 4.4• If e > (b + d)• National welfare is increased

• If e = (b + d)• National welfare remains constant

• If e > (b + d)• National welfare is diminished


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• Optimum tariff • Maximize the positive difference between• Gain of improving terms of trade (area e)• Loss in economic efficiency from the protective

effect (area b)• Consumption effect (area d)

• Is only beneficial to the importing nation• Beggar-thy-neighbor policy, could invite

retaliation


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TRADE CONFLICTS Gains from eliminating import tariffs

• If only United States removed tariffs and other restraints on imported products• Lowers the price of the affected imports• Lower the price of the competing U.S. good• Economic gains to the U.S. consumer• Decrease the production costs • Domestic profit reductions


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TRADE CONFLICTS Gains from eliminating import tariffs

• If only United States removed tariffs and other restraints on imported products• Displaced workers from the domestic industry

that loses protection• U.S. government loses tax revenue

• Estimated annual economic welfare gains from eliminating significant import restraints• Welfare gain of about $3.7 billion to the U.S.

economy


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Economic welfare gains from liberalization of significant import restraints*, 2005 (millions of dollars)

TABLE 4.8

Annual change in Economic Welfare Import-Competing Industry

Textiles and apparelSugarDairyFootwearEthyl alcoholBeefTunaGlass productsTobacco

$1,885 millions81157324912048242019

*Import tariffs, tariff-rate quotas, and import quotas


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How a Tariff Burdens Exporters• Effects of import tariffs on exporters• Higher production costs – from imported inputs• Cannot pass it to the buyers• Higher prices• Reduced overseas sales

• Raise the cost of living• Higher wages• Higher production costs

• International repercussions• Lead to reductions in domestic exports


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A tariff placed on imported steel increases the costs of a steel-using manufacturer. This increase leads to a higher price charged by the manufacturer and a loss of international competitiveness.

How an import tariff burdens domestic exportersFIGURE 4.5


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Steel Tariffs Buy Time for Troubled Industry

• 2001, President Bush, import tariff program• Revitalize steel industry• American steel companies - lack of

competitiveness• Heavy burden on American steel-using

industries• Temporarily save roughly 6,000 jobs• At a cost to U.S. consumers and steel-using firms:

$800,000 -$1.1 million per job


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Steel Tariffs Buy Time for Troubled Industry

• 2001, President Bush, import tariff program• Save 1 job in steel manufacturing – at a cost of

13 jobs in steel-using industries • Increased production costs for a large number

of U.S. companies that use steel• 2007, Government trade regulators• Revoke tariffs on high-end steel imports from

certain countries


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President Bush’s steel trade remedy program of2002–2003: selected products

TABLE 4.9


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Tariffs and the Poor• Tariffs are inequitable• Impose the most severe costs on low-income

families• Higher tariffs on cheap goods than luxuries• Affect different countries in different ways• Burdens countries that specialize in the cheapest

goods• Very poor countries in Asia and the Middle East


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U.S. tariffs are high on cheap goods, low on luxuriesTABLE 4.10


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Arguments for Trade Restrictions• Free-trade argument• If each nation produces what it does best and

permits trade• In the long term• Lower prices• Higher levels of output, income, and consumption


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Arguments for Trade Restrictions• Job protection argument• Alleged job losses to foreign competition• Omits: dual nature of international trade• Trade restrictions on textiles and apparel, steel,

and automobiles• Little or no positive effect on the level of

employment in the long run


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Arguments for Trade Restrictions• Job protection argument• Job gains for only a few industries• Job losses spread across many industries• Each job saved• Ends up costing domestic consumers more than the

worker’s salary


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Arguments for Trade Restrictions• Protection against cheap foreign labor• Low wages abroad make it difficult for U.S.

producers to compete with producers using cheap foreign labor• Fails to recognize the links among efficiency,

wages, and production costs• Low wages by themselves do not guarantee low

production costs• Low-wage nations -competitive advantage • Only in the production of goods requiring greater

labor and little of the other factor inputs


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Hourly compensation costs in U.S. dollars for production workers in manufacturing, 2007

TABLE 4.11


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Productivity, wages, and unit labor costs, relative to the U.S.: total manufacturing, 2002 (U.S.= 1.0)

TABLE 4.12


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Arguments for Trade Restrictions• Fairness in trade • Foreign governments play by a different set of

rules• Foreign firms unfair competitive advantages

• Trade benefits the domestic economy even if foreign nations impose trade restrictions• Does not recognize the potential impact on

global trade


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Arguments for Trade Restrictions• Maintenance of the domestic standard of living• One nation imposes a tariff that improves its

income and employment• At the expense of its trading partner’s living

standard• Retaliatory tariffs• Lower level of welfare for all nations


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Arguments for Trade Restrictions• Equalization of production costs• Scientific tariff - to eliminate unfair competition

from abroad• Problems• Different costs across business• Higher domestic prices• Benefit efficient domestic companies• Domestic consumer would be subsidizing inefficient

production


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Arguments for Trade Restrictions• Equalization of production costs• Approximates a prohibitive tariff• Completely contradicts the notion of comparative

advantage• Wipes out the basis for trade and gains from trade


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Arguments for Trade Restrictions• Infant-industry argument• Trading nations should temporarily shield their

newly developing industries from foreign competition• Once a protective tariff is imposed - very

difficult to remove• Special-interest groups - convince policy makers

that further protection is justified


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Arguments for Trade Restrictions• Infant-industry argument• Very difficult to determine which industries will

be capable of realizing comparative advantage potential• Not valid for mature, industrialized nations• There may be other ways of insulating a

developing industry from cutthroat competition• Subsidize the industry


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Arguments for Trade Restrictions• Noneconomic arguments• National security argument• Protect essential industries• What constitutes an essential industry

• Cultural and sociological considerations• Arguments justifying tariffs• Based on the assumption that the national

welfare, as well as the individual’s welfare, will be enhanced


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TRADE CONFLICTS Petition of the candle makers

• Frederic Bastiat, French Chamber of Deputies• Satire of protectionists’ arguments, 1845• A law be passed requiring people to shut all

windows, doors, and so forth• So that the candle industry would be protected

from the “unfair” competition of the sun• Great benefit to the candle industry• Creating many new jobs and enriching suppliers


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Arguments for Trade Restrictions• Political economy of protectionism• Elected officials form policies to maximize votes

and remain in office• Bias in the political system that favors

protectionism• Protection-biased sector • Import competing producers• Labor unions - in that industry• Suppliers to the producers in the industry


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Arguments for Trade Restrictions• Political economy of protectionism• Protection-biased sector • Seekers of protectionism• Established firms in an aging industry - lost their

comparative advantage

• Free-trade-biased sector • Exporting producers, their workers, and their

suppliers


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Arguments for Trade Restrictions• United States’ protection policy • Dominated by special-interest groups that

represent producers• Gains from protection – concentrated among well-

organized producers and labor unions• Consumers• Not organized; Losses widely dispersed• Absorb individually a small & difficult-to-identify

cost;• Uninformed


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Arguments for Trade Restrictions• Supply of protectionism• By the domestic government• Depends on:• The costs to society• The political importance of import-competing

producers• Adjustment costs• Public sympathy


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Arguments for Trade Restrictions• Demand of protectionism• By the domestic companies and workers• Depends on:• Comparative disadvantage• Import penetration• Concentration• Export dependence

Tariffs © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in...

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