Trade Policies

Tariffs and Quotas

Tariffs

Tariff: A tax on import

• Specific tariff: a per unit tax on imports

• Ad valolrem tariff: a value based tax on imports

• Why impose tariff? • To discourage consumption

• To raise revenue

• To discourage imports

• To protect domestic industries

Tariffs and Economic Welfare

• The small country case

• The large country case

• Effective rate of protection

Measuring Tariff Rates

• Tariff rates vary across goods and and services as well over time

• An unweighted average tariff rate• A Weighted average tariff rate: the sum of

weighted tariff rates; for each good the rate weighted based on the percentage value of the import of that good relative to the total value of all imports

The Small Country Case

D

S

Q

P

Pw

Pw+ T

Pa

o Q1

Q3 Qo Q4 Q2

b

c

d e

f g

h i k Tariff

The Large Country Case

D

Sd +w

Sd+w +t

Sd

Q

P

o q1 q3 q2 qo

m rs

P1

P0P2

Tariffs and Offer Curves Case of a small country

TTAA`

Good X

Good Y

X2 X1

Y2

Y1

Tariffs and Offer Curves

B

AA`

TTTT`

X

Y

0

A tariff is imposed by Country ANote the change in the terms pf trade:TT

Optimal Tariff

• For a small country: A zero tariff rate

• For a large country that can affect the terms of trade: Maximize the difference between the gain (s) and the losses (m+r) from a tariff

• The effect of tariffs on input prices

The Effective Rate of Protection

• The protective effect of tariff based on the value added

tf - a.ti

• ETR = ------------

1 - a

a = value of import as % of the value of final good

f hg i Dw

Dw -t

Q0 q2 q1q4 q3

P Export Tax

P1

P0

Non-tariff Barriers to Trade • Quotas

Quantitative restrictions on imports• Voluntary export restrictions • Export subsidies • Dumping • Regulatory and technical standards• Government purchasing policies• How to measure non-tariff barriers

Quota

po

p1

Y

a b

cd

Sd

Dd

Tariffs vs Quotas

• Greater loss of welfare for the importing country with quotas

• Quotas are less flexible

oo Q Q q1 q3 qo q2 q1 q2q3 q4

D

D’

D

D’

Sd

Sd +t

SdP P

Export Policies

• Export taxes: » Small counties » Large countries

• Export subsidies

• Voluntary export restraints

• Countervailing Duties (Against subsidies)

Dw-S2

Dw

Dw +S1

Dd

SdP

Qx

o q3 q1 qo q1

po

Po-s

Po+s

a b

c d

e f

Dumping

• Sporadic dumping

• Persistent dumping

• Predatory dumping

Dumping

Dh

MR

De

MR

MC

Ph

Pe

QQ

$ $

oo

Export Subsidies

• An export subsidy lowers the cost of production for the produces in the exporting country.

• The cost of a subsidy is borne by the taxpayers in the exporting country.

• An export subsidy lowers the price to the importing country, resulting in an increase in the exports for exporting county; that is an increase in imports for the importing country.

An Export Subsidy from the Perspective of the

Importing Country: A Small Country

D

Sd

Pw

Pw -s

0

s

= Pw-s+c

Q

fe gh

P1

P2

Non-Tariff Barriers

• Technical standards

• Regulatory standards

• Administrative standards

• Domestic-content requirements

• Rules of origin

• Government-procurement policies

Arguments for Protection

• Infant Industry Argument

• Imperfect Competition» The Optimal Tariff

» The Case of a Monopoly

• Strategic Trade Policy» The Learning Curve

» Profit Shifting (The Game Theory)

• Externalities

Tariffs vs. Subsidies

QQ

Sw Sw

Sd

Ss

Sw + t

Qo Q1 Q2 Qo Q1 Q2

c e f

SdPP

o o

D D

s

The Optimal Tariff

Dd

Q

Sd+w

Sd+w +tSd

0

P0

P2

P2

s

International Trade and a Monopoly• Under autarky a monopoly under-produces

• Free trade forces a monopoly to behave like a competitive firm.

• A tariff protection for a monopoly is less restrictive than a quota protection.

Monopolies and Tariffs

MC

DQ

0

MR

Sw

Q1 Q2 Q3

Sw +t

A monopoly and a Quota

MC

D

DqMRq

Q1 Q2 Q3 Q40

Trade and Externalities

EB

0 Q

EB

q1 q2

Positive Externalities S

D Sw

Sw +t

Q

Q

o

o

CE

EB

Negative Consumption Externalities S

D Sw

Sw +t

Q

Q

o

o

CE