Tariffs

Transcript Tariffs

Tariffs

Why restrict trade?

 Benefits of free trade come in the long term, and are usually spread widely across society  Costs of free trade are felt rapidly and are usually concentrated in specific sectors of the economy (usually import-competing industries and scarce factors) 1 Carbaugh, Chap. 4

Tariffs

Defining tariffs

 A tariff is a tax (duty) levied on products (final goods, intermediates or raw materials) as they move between nations   Import tariff - levied on imports Export tariff - levied on exported goods as they leave the country  Protective tariff - designed to insulate domestic producers from competition  Revenue tariff - intended to raise funds for the government budget (no longer important in industrial countries) Carbaugh, Chap. 4 2

Tariffs

Types of tariff

 Specific tariff – a fixed monetary fee per unit.

 Ad valorem tariff  A percentage of the value of the product (like a sales tax) - FOB vs. CIF  Compound tariff  A combination of the above, often levied on finished goods whose components are also subject to tariff if imported separately 3 Carbaugh, Chap. 4

Tariffs

Selected US tariffs

Product Brooms Fishing reels Wrist watches (without jewels) Ball bearings Electrical motors Bicycles Wool blankets Electricity meters Auto transmission shafts Duty Rate 32 cents each 24 cents each 29 cents each 2.4% ad valorem 6.7% ad valorem 5.5% ad valorem 1.8 cents/kg + 6% ad valorem 16 cents each + 1.5% ad valorem 25 cents each + 3.9% ad valorem Source:

U.S. International Trade Commission,

Tariff Schedules of the United States

(Washington, DC: U.S. Government Printing Office, 2004); http://www.usitc.gov/t affairs.htm.

Carbaugh, Chap. 4 4

Tariffs

Effective rate of protection

 The impact of a tariff often differs from its stated nominal tariff rate  The

effective tariff rate

measures the total increase in domestic production that the tariff makes possible, compared to free trade  Measures the degree to which domestic producers can be less efficient compared to foreign producers.

 Domestic producers may use imported inputs which are subject to tariffs, so calculation of the effective tariff rate is not simple 5 Carbaugh, Chap. 4

Effective rate of protection

 t e    t e  = (t nom – t i *a)/(1 – a) a = value imports/value final good t i = tariff rate on imported inputs = D value added/(original value added) The higher t i (tariff on imported inputs), the

lower

the effective tariff since domestic producers pay more for their inputs.

 If imported inputs have low duties and final goods have high duties then the effective tariff rate is high; called tariff escalation.

Carbaugh, Chap. 4 6

Example

 Free trade price $100, inputs $80; t i  Free Trade: Domestic Foreign = 0%.

Components Value added Price $ 80 $ 20 $100 $ 80 $ 20 $100 Carbaugh, Chap. 4 7

  Ad valorem final good tariff = 10%; Price = $110 Tariff: Domestic Foreign Components $ 80 $ 80 Value added Tariff $ 30 ------ $ 20 $ 10 t Price e $110 $110 = D value added/value added = ($30 - $20)/$20 = 0.5 or 50% effective tariff rate.

t e = (t nom – t i *a)/(1 – a) = {0.1 – (0)*(0.80)}/(1 – 0.80) = 0.1/0.2 = 0.5 = 50% effective tariff rate.

Carbaugh, Chap. 4 8

 

Tariff on inputs

: t i = 10% Tariff: Domestic Components $ 88 Foreign $ 80 Value added Tariff $ 22 ------ $ 20 $ 10 t Price e $110 $110 = D value added/value added = ($22 - $20)/$20 = 0.1 or 10% effective tariff rate.

t e = (t nom – t i *a)/(1 – a) = {0.1 – (0.10)*(0.80)}/(1 – 0.80) = 0.02/0.2 = 0.10 = 10% effective tariff rate.

Carbaugh, Chap. 4 9

Tariffs

Nominal & effective tariff rates

Product United States Nominal rate (%) Effective rate (%) Nominal rate (%) Japan Effective rate (%) European Union Nominal rate (%) Effective rate (%) Agriculture, forestry, fish 1.8% 1.9% 18.4% 21.4% 4.8% 4.1% Food, beverages, tobacco 4.7 10.6 25.4 50.3 10.1 Textiles Wearing apparel Leather products Footwear Wood products Furniture and fixtures Paper and paper products 9.2 22.7 4.2 8.8 1.6 4.1 0.2 18.0 43.3 5.0 15.4 1.7 5.5 -0.9 3.3 13.8 3.0 15.7 0.3 5.1 2.1 2.4 42.2 –14.8 50.0 –30.6 10.3 1.8 7.2 13.4 2.0 11.6 2.5 5.6 5.4 Printing and publishing 0.7 0.9 0.1 –1.5 2.1

*Following the completion of the Tokyo Round of Multilateral Trade Negotiations in 1979.

Source:

Alan Deardorff and Robert Stern, “The Effects of the Tokyo Round on the Structure of Protection,” in R. Baldwin and A. Krueger,

The Structure and Evolution of Recent U.S. Trade Policy

(Chicago: University of Chicago Press, 1984), 368 –377.

Carbaugh, Chap. 4

17.8 8.8 19.3 –2.2 20.1 1.7 11.3 8.3 -1.0

Tariff effects

Who pays for import restrictions?

    Domestic consumers face increased costs  Low income consumers are especially hurt by tariffs on low-cost imports  Overall the economy suffers DWL due to production and consumption effects Export industries face higher costs for inputs Cost of living increases Other nations may retaliate, further restricting trade 11 Carbaugh, Chap. 4

Reasons for tariffs

**Arguments for trade restrictions**

 Job protection  Protect against cheap foreign labor  Fairness in trade - level playing field  Protect domestic standard of living  Equalization of production costs  Infant-industry protection  Political and social reasons Carbaugh, Chap. 4 12

Reasons for tariffs

Politics of protectionism

 “Supply” of protectionism (trade policy) depends on:   the cost to society of restricting trade  the political importance of the import competing industries  Magnitude of the adjustment costs from free trade Public sympathy for those sectors hurt by free trade 13 Carbaugh, Chap. 4

Reasons for tariffs

Politics of protectionism

 “Demand” for protectionism depends on:  The amount of the import competing industry’s comparative disadvantage  The level of import penetration   The level of concentration in the affected sector The degree of export dependence in the sector Carbaugh, Chap. 4 14