Import Tariffs and Other Instruments of Trade Policy Flashcards
what are the different tariff types?
A specific tariff is levied as a fixed charge for each unit of
imported goods
An ad valorem tariff is levied as a fraction of the value of
imported goods.
graphically what is the net enefit of tariffs?
The net benefit of tariff is equal to the area of the colored rectangle minus the
area of the two shaded triangles.
there is a loss of efficiency countred by the terms of trade benefit by forcing world price downward. at the expense of smaller countries (only for large countries)
A small country cannot influence world price, and
hence cannot have any terms of trade gain by lowering the price
what is an import quota?
a restriction on the quantity of a good that may be imported
Steel: In recent years, the United States has imposed import quotas on steel from various countries, including China and South Korea. These quotas were implemented under Section 232 of the Trade Expansion Act of 1962, which allows the U.S. government to impose tariffs or quotas on imports that are deemed a threat to national security. - overreliance on steel, protects domestic supply
how are import quotas enforced?
restriction is usually enforced by issuing licenses or quota rights
what are the issues with import quotas allocation
Quota licence to home firms
May result in rent seeking, i.e. wasteful activities (bribes, inefficient
use of resources, etc.) in pursuit of acquiring quota license
auctions
Generates same revenue to govt as import tariff with same import
quantity
what are local content requirements
requires a specified fraction of a final good to be produced
domestically
Local content requirement provides neither government
revenue (as a tariff would) nor quota rents
Instead, the difference between the prices of home goods and
imports is averaged into the price of the final good and is
passed on to consumers
what is The effective rate of protection
The effective rate of protection measures how a tariff or
other trade policy in one industry provides protection for
domestic producers in same and other industries.
It represents the change in value that an industry adds to the
production process when trade policy changes.
The change in value that an industry provides depends on the change
in prices when trade policies change.
basically protects domestic industries against foreign competition= domestic companies can raise prices to reflect what the tariff costs imports = this can encourage domestic industry or fdi
what is an optimal tariff
a tariff that optimises welfare
how do domestic producers gain from tarriffs
in a large country. The tariffs raise the price of goods unnaturally. domestic producers, not paying the tariff can increase their prices and earn healthy profits. exporters have to then lower there prices and pay the tariff to compete with domestic producers.
therefore a large country can gain in terms of trade and a smaller exporting country will be worse off. the govt also captures revenue from this deal
where is the optimal tariff
small enough where the terms of trade excceeds the effeciency loss
