Trade Tariffs Flashcards
What is an import tariff?
- a tax (or duty) on imported goods or services
* most common tariff and most likelyy to have welfar effects
What is an export tariff?
a tax on exported goods or services.
Where are export tariffs usually seen?
- Rarely seen in developed countries
* Occasionally practiced in developing countries to generate government revenue, and/or restrict export
What are some non-tariff barriers?
Quota, subsidy and etc
What is an Ad Valorem tariff?
A fixed percentage tax on the traded commodity e.g. car tax of 20% of the car value
What is a specific tax?
A fixed tax per unit of a traded commodity-not related to the value of the product e.g. £1000 tariff on any car
What is a compound tariff?
A combination of an ad valorem and specific tariff
What do the implications of a tariff depend on?
- Nature of the country
* Whether it is small or large
What is a small country in terms of trade?
- Changes in its domestic market do not alter the international price of the commodity
- Therefore, the imposition of a tariff does not alter the international price
- Country acts as a “price-taker” in the international market
What is a large country in terms of trade?
- Changes in its domestic market do alter the international price of the commodity.
- This means that the imposition of a tariff does alter the international price.
How can the effects of a tariff be seen graphically?
The effects of a tariff are easily seen in a market supply and demand diagram
What are the effects on a small country if the international price is lower than the market clearing autarky equilibrium price?
- the country will be an importer of the item
* production will decrease domestically and consumption will increase due to the imports
What are the effects on a small country that imports a
product when an ad valorem tariff is placed on imports?
- Domestic price rises on those imports
- Domestic production increases
- Demand decreases
- Imports fall
- the government will begin collecting tariff revenue in this market (additional tariff price X import quantity)
What concepts are used to show welfare changes of a tariff?
consumer and producer surplus must be considered
what is the consumer surplus?
- the difference between what consumers are willing to pay for a specific amount of a commodity and what they actually pay for it.
- consumer surplus is the area under the demand curve and above the price paid on every unit purchased.
What is the producer surplus?
•The extra payment received by producers above what needed to have been paid to cause them to produce the commodity.
-producer surplus is the area below the price received and above the supply curve on every unit sold.
What is the impact on consumer surplus in a small country at autarky, free trade and import tariff?
- consumer surplus is above the equilibrium price in autarky
- This increases in free trade down to international price
- A tariff reduces it by the difference between the international and the tariff price
What is the impact on producer surplus in a small country at autarky, free trade and import tariff?
- Producer surplus is below the equilibrium price in autarky
- In free trade, it reduces the surplus to the international price
- With a tariff, the surplus increases again by the difference between the international and the tariff price
Explain the overall welfare gains and losses of a tariff in a small country
- Entire region between tariff price and international price is lost by consumers
- The portion of this above the supply curve is gain by producers
- The rectangular area between the supply and demand curve is gained by the government as revenue
- the net welfare result is a loss to society indicated by the deadweight loss regions
Why do the effects of a tariff differ for a large country compared to a small country?
• Due to the terms of trade effect
What is the terms of trade effect?
- Where the imposition of a tariff results in a fall in import demand that lowers the international price.
- Terms of trade: export price/import price
What could happen with a 50% tariff on imports with a large country?
- It could result in a drop of the international price from $20 to $15.
- This takes the tariff price to $22.50 per unit
- production rises to the tariff price
- Consumption falls to the tariff price
- Imports fall
Explain the welfare gains and losses of a tariff in a large country
- Entire region between tariff price and international price is lost by consumers
- The portion of this above the supply curve is gain by producers
- The rectangular area between the supply and demand curve and from the tariff price to the new international price is gained by the government as revenue
What is the overall net effect of tariff on a large country?
- The net effect is a welfare gain.
* The improvement in the terms of trade more than offsets the potential deadweight loss of the tariff.
What impacts the extent of welfare effects?
Elasticity of demand of supply will affect the welfare change
What does the drop in international price depend on?
The larger the country, the larger the drop
What is an optimum tariff?
An optimal tariff is the tariff rate that maximizes the benefit resulting from the imposition of a tariff (mainly in a large country)
Explain optimum tariff
- As you increase a tariff, welfare increases up to the optimum tariff ( terms of trade gain exceeds deadweight loss)
- After the optimum point welfare decreases as terms of trade decreases but still higher than deadweight loss
- Continued tariifs means welfare loss as terms of trade less than deadweight loss
- At this point there is no trade as the tariff is too high
- Between b and B’- welfare is higher than free tarde
What is the criticism of optimal tariff?
• positive welfare gains exist only if no retaliation in other markets occurs after the imposition of a tariff.
- history does not support the ‘no retaliation’ assumption
- welfare gains can be offset by the tariffs put on that country’s exports by other countries e.g. trade war
What are the other consequences of tariffs?
- Retaliation
- Lack of innovation
- Reduced economies of scale
explain the innovation consequence of a tariff?
- Tariffs reduce competitive pressures on domestic firms
* Therefore their incentives to innovate and improve the quality of existing products
Explain the economies of scale effects of a tariff?
• Each country rather than specialissing, makes small quantities of all goods to satisfy domestic customers
• By not producing large amounts of one good, there is less economies of scale
-so cost of tariffs may be higher in industries with economies of scale
