Chapter8TradeRestrictions:Tariffs8.1Introduction:TradeorcommercialpoliciesTariffisataxordutyleviedonthetradecommodityasitcrossesanationalboundary.Importtariff,exporttariff.Advaloremtariff:afixedpercentageofthevalueofthetradedcommoditySpecifictariff:afixedsumperphysicalunitofthetradedcommodityCompoundtariff:acombinationofanadvalorumandaspecifictariff.Task1,readcasestudy8-1and8-2tohavearoughideaofaveragetariffonindustrialproductsinmajordevelopedcountriesandinsomemajordevelopingcountries8.2PartialEquilibriumAnalysisofaTariffConsumptionEffectofaTariffProductionEffectofaTariffTradeEffectofaTariffRevenueEffectofaTariff8.2APartialequilibriumEffectsofatariff2030100Px($)23154405060BAENH7080JMCGSxDxSF+TSFT8.2BEffectsofaTariffonConsumerandProducerSurplusAreductioninconsumersurplusandanincreaseinproducersurplus2030100Px($)23154405060BAENH7080KLZGRDxWQ2030100Px($)23154405060AV7080JUCGSxx8.2CCostsandBenefitsofatariff2030100Px($)23154405060BAENH7080JMCGSxDxRa=$15b=$5c=$30d=$10banddrepresentstheprotectioncostordeadweightlosstotheeconomy8.3TheTheoryofTariffStructure8.3ATheRateofEffectiveProtectionAnationoftenimportsarawmaterialdutyfreeorimposesalowertariffrateontheimportationoftheinputthanontheimportationofthefinalcommodityproducedwiththeimportedinput.

Therateofeffectiveprotection(calculatedonthedomesticvalueadded,orprocessing,thattakesplaceinthenation)exceeds

thenominaltariffrate(calculatedonthevalueofthefinalcommodity)

Domesticvaluedaddedequalsthepriceofthefinalcommodityminusthecostoftheimportedinputsgoingintotheproductionofthecommodity.Therateofeffectiveprotectionisusuallycalculatedbythefollowingformula:g=therateofeffectiveprotectiontoproducersofthefinalcommodityt=thenominaltariffrateonconsumersofthefinalcommodity

ai=theratioofthecostoftheimportedinputtothepriceofthefinalcommodityintheabsenceoftariffs

ti=thenominaltariffrateontheimportedinputExample:1)t=10%;ai=$80/$100=0.8,ti=0g?2)t=10%;ai=$80/$100=0.8,ti=0.05g?3)t=10%;ai=$80/$100=0.8,ti=0.1g?4)t=10%;ai=$80/$100=0.8,ti=0.2g?Conclusions?Atariffonimportedinputsisataxondomesticproducersthatincreasestheircostofproduction,reducestherateofeffectiveprotectionprovidedbyagivennominaltariffonthefinalcommodity,andthereforediscouragesdomesticproduction.Readcasestudy8-5and8-6toseethepracticaluseofeffectiverateofprotectionininternationaltrade.8.4GeneralEquilibriumAnalysisofaTariffinaSmallCountry8.4AWhenaverysmallcountryimposesatariff,itwillnotaffectpricesontheworldmarket,butthedomesticpriceiftheimportablecommoditywillrisebythefullamountofthetariffforindividualproducersandconsumers.8.4BIllustrationoftheEffectsofaTariffinaSmallCountry8.4CTheStolper-SamuelsonTheoremAnincreaseintherelativepriceofacommodity(forexample,asaresultoftariff)raisesthereturnorearningsofthefactorusedintensivelyintheproductionofthecommodity.Thus,therealreturntothenation’sscarcefactorofproductionwillrisewiththeimpositionofatariff.8.5GeneralEquilibriumAnalysisofaTariffinaLargeCountry8.6TheOptimumTariffTheoptimumtariffisthatratethatmax