Tariffs Flashcards
Specific / unit tariff =
Fixed charge per unit of imported goods.
Ad valorem tariff =
Fraction of the value of the imported good.s
What’s the oldest form of trade policy?
Tariffs
Info on when corn laws introduced and why?
1815 until 1846
To protect UK agriculture against grain imports from Denmark and Prussia
After when did % of government revenue coming from tariffs substantially decrease in US?
Civil war 1861-1865
What type of analysis do we do for a tariff?
Partial equilibrium - we look at effects on a single market
If in Autarky P* wheat < P wheat, who exports and who imports once we open up?
Foreign exports
Home imports
2 simplifying assumptions for tariff analysis
- No transport costs
2. One world currency
How do we find the Autarky price of wheat?
Where D=S in domestic market
How do we draw MD curve? What does it look like?
MD curve = 0 at Autarky price.
Slopes down - lower p = higher demand, lower supply = more imports
How do we draw XS curve and what does it look like?
XS curve = 0 at foreign Autarky price.
Slopes up - Higher price = higher supply, lower demand = more exports
World equilibrium free trade at
MD = XS
import demand = import supply
Implies world demand = world supply
How does Pw relate to 2 Autarky prices?
Pw is between 2 Autarky prices.
After a tariff, when are foreign exporters willing to export?
Since trade increase transport costs, only willing to export if compensated enough by price differential.
Price differential > tariff
Or price UK - tariff > price Denmark
At the original world price, how do demand and supply react in home and foreign?
The tariff makes some shippers unwilling to export
So excess demand at home
Excess supply in foreign
How does a tariff cause prices in home and foreign to change relative to the free trade price?
Excess demand at home —> price rises PT > Pw
Excess supply at home —> price falls PT* < Pw
What’s the tariff equilibrium?
Prices adjust until: PT - PT* = t
Arbitrage argument.
At this price differential, quantity of imports = quantity of exports.
How does a tariff affect world trade?
It reduces it since MD and XS both contract.
How much does PT rise by after the tariff in the economy is large?
Rise in PT < tariff
Pass through / incidence < 100%
Shared burden between home consumers & foreign producers.
Why is the foreign incidence typically low?
Because foreign = ROW
When is the tariff incidence 100% for home? How does this affect prices?
If the importing country is sufficiently small, it has no power to influence foreign’s price since its demand is a small part of world demand.
Hence: PT* = Pw, PT = Pw + t
Effective rate of protection definition
How much protection a tariff provides to domestic producers
Effective rate of protection formula
VT - Vw / Vw
The change in value added in production from free trade to tariff equilibrium.
Why is the effective rate of protection usually not equal to the tariff rate?
Because the tariff affects many sectors other than the protected sector.
Who provided evidence on effective rate vs tariff rate and what did they find?
Deardoff and Stern (1996)
Aggregated all traded goods in US and Japan into 22 sectors
Found effective rate > tariff rate in all cases.
Consumer surplus =
The difference between what a consumer actually pays and what they’re willing to pay
Consumer surplus on the demand curve is
CS = area under demand curve above price
Willingness to pay of consumers is given by….
The demand curv
Producer surplus =
Differences between price producers actually receive and price they’re willing to sell at.
Producer surplus on supply curve
PS = area above supply curve and below price.
Willingness to sell of producers shown by…
Supply curve
Change in consumer surplus
Minus abcd
Change in domestic producers surplus
Plus a
Change in government revenue
c + e
Government tariff revenue formula
Quantity imports x tariff
Tariff rate is given by…
t = PT - PT*
Why does a tariff create efficiency losses? 2 other names for them.
Producer inefficiency form producing too much
Consumer inefficiency from consuming too little
DWL / Harberger triangles
Intuition behind why there is an efficiency loss.
Because home produces goods that could be produced more cheaply abroad.
Why is there a TOT gain from a tariff?
Tariff reduced foreign export price hence lower domestic import price.
TOT = Px/Pm so Pm falls TOT rises for home.
Tariff raises price consumers end up paying, but price imported at falls.
Out of the governments gain, what are the two components of it?
- TOT gain
2. Capture some CS - so government gain at expense of domestic consumers.
Net effect of tariff for home=
b + d - e
I.e. efficiency loss - TOT gain
The effect is AMBIGUOUS
If b+d-e>0 —> net cost
Net effect of tariff for home is a SMALL country
No TOT gain since Pm unchanged (PT* = Pw still)
So net effect = b + d > 0 —> net cost is unambiguous
2 caveats to tariff welfare analysis
- We treat every £ lost and gained as equally valuable - but tariff could hit poor harder, or government could waste the money so even if e > b + d, social welfare effect could be negative.
- Selfish perspective: ignore effect on foreign welfare
Net effect of a tariff on foreign
Double whammy - efficiency loss + TOT loss so negative effect.
Net effect of tariff on global welfare
ALWAYS NEGATIVE
