1、4TariffsIntroduction Free-trade policies meet major resistance despite benefits Barriers to free trade TariffsThe Tariff Concept Tariff:A tax(duty)levied on a product when it crosses national boundaries Import tariff Export tariff Tariffs may be imposed for protection or revenue Protective tariff Re
2、venue tariff Decreasing tariff revenue trend for industrial nations Percentage of government revenue derived from tariffs(Table 4.1)BackTypes of Tariffs Specific tariff Fixed amount of money per physical unit of the imported product Easy to apply and administer Protection to domestic producers durin
3、g recession Degree of protection it affords domestic producers varies inversely with changes in import prices Selected U.S.Tariffs(Table 4.2)Types of Tariffs Ad valorem(of value)tariff Fixed percentage of the value of the imported product Manufactured goods-Wide range of grade variations Constant de
4、gree of protection during periods of changing prices Administrative complexities:Customs valuation Determining the value of an import Variations in the methods used to determine values Example:Differences in the use of free-on-board(FOB)in the U.S.,and cost-insurance-freight(CIF)in European countrie
5、sContinuedTypes of Tariffs Compound tariff Combination of specific and ad valorem tariffs Often applied to manufactured products embodying raw materials subject to tariffs Specific portion neutralizes the cost disadvantage resulting from tariff protection granted to domestic suppliers of raw materia
6、ls Ad valorem portion of the duty grants protection to the finished-goods industry Tariffs for selected countries(Table 4.3)ContinuedBackBackSmuggled Steel Evades U.S.Tariffs Concerns the government and the steel industry Loss of tariff revenue Products made cheaper by tariff evasion Methods used to
7、 evade tariffs:False reclassifications to reflect duty-free products Detach markings:Changing the country of origin Altering chemical compositions of products Effective Rate of Protection Nominal tariff rate Gives a general idea of the level of protection Applies only to the total value of the final
8、 import product Effective tariff rate Indicator of actual level of protection that a nominal tariff rate provides Total increase in domestic productive activities in comparison with the occurrence under free-trade conditionsEffective Rate of Protection Effective tariff rate e:effective rate of prote
9、ction n:nominal tariff rate on the final product a:ratio of the value of the imported input to the value of the final product b:nominal tariff rate on the imported input Effective Rate of Protection(Table 4.4)ContinuedBackEffective Rate of Protection Consequences of effective-rate calculation:Degree
10、 of effective protection increases as the value added by domestic producers declines A tariff on imports used in production process reduces the level of effective protectionContinuedTariff Escalation Offers greater protection to intermediate and finished products than to primary commodities For the
11、U.S.,effective rate of protection tends to be higher than the nominal rate(Table 4.5)Tariffs rise significantly with the level of processing in many industrial countries(Figure 4.1)May discourage the growth of processing Hampers diversification into higher value-added exports for the less-developed
12、nationsBackBackOutsourcing and Offshore-Assembly Provision(OAP)Foreign assembly type of outsourcing Retain higher production and employment levels in the U.S.than may be otherwise possible OAP Favorable treatment to products assembled abroad from U.S.-manufactured components Pertains to foreign comp
13、anies as well Use of U.S.components and materials in foreign assembly operations(Table 4.6)BackPostponing Import Duties Bonded warehouse Imported goods temporarily left duty-free Duties paid when withdrawn for consumption No duty required if withdrawn for export Foreign trade zone(FTZ);free zone or
14、free port Enlarges benefits of a bonded warehouse by:Eliminating restrictive aspects of customs surveillance Offering suitable manufacturing facilities Not considered within U.S.Customs territory Manufacturers seek FTZ status to obtain relief from inverted tariff schedulesTariff Welfare Effects:Cons
15、umer and Producer Surplus Consumer surplus Difference between the amount buyers would be willing and able to pay for a good,and the actual amount they pay Inversely proportionate to market price Producer surplus Revenue received over and above the minimum amount required to induce producers to suppl
16、y goods Directly proportionate to market price Consumer surplus and producer surplus(Figure 4.2)BackTariff Welfare Effects:Small Nation Model Price taker nation Faces a constant world price level for its import commodity Introduction of import tariff:Lowers national welfare(Figure 4.3)Revenue effect
17、 Redistributive effect Protective effect Consumption effect Deadweight lossBackTariff Welfare Effects:Large-Nation Model Changes in quantity of its imports,using tariff policy,influences the world price of the product Terms of trade can improve for nation imposing the tariff Effects of increases in
18、U.S.tariffs on the world price of imported goods(Table 4.7)BackTariff Welfare Effects:Large-Nation Model Economic effects of an import tariff for a large nation(Figure 4.4)Components of revenue effect Domestic revenue effect Terms-of-trade effectContinuedBackTariff Welfare Effects:Large-Nation Model
19、 A tariff causes:Gain due to improved terms of trade Loss due to reduced import volume Optimum tariff rate Tariff rate at which positive difference between the gain and loss is maximized Only beneficial to the importing nation A beggar-thy-neighbor policy;could invite retaliationContinuedHow a Tarif
20、f Burdens Exporters Higher prices of imports due to tariffs injure domestic exporters Increases input costs,leads to higher prices and reduced overseas sales Example:Caterpillar Inc.(Figure 4.5)Raises the cost of living by increasing the price of imports International repercussions lead to reduction
21、s in domestic exportsBackHow a Tariff Burdens Exporters Domestic exporters do not protest policies on tariff-induced cost increases because:Increases are subtle and invisible Magnitude of increases render companies incapable of developing No tangible basis for political resistanceContinuedTariff Bur
22、dens Exporters Consequences for U.S.manufacturers paying more for steel inputs than foreign competitors:Increase in raw material costs Threat to accessing steel products not manufactured in the U.S.Increased foreign competition for the products they makeBushs Steel Tariffs Buy Time for Troubled Indu
23、stry Tariffs on imported steel products:2002(Table 4.8)Critics Big integrated companies:Lack of competitiveness Burden on steel-using industries Cost of saving jobs Positives Relief from imports Cost cutting;mergers;renegotiation of labor contracts Removal of tariffs(December 2003)Primarily in respo
24、nse to W.T.O rulingBackTariffs and the Poor Empirical studies often maintain that:Welfare costs of tariffs can be high Tariffs cause inequitable income-distribution U.S.tariffs highest on goods important to the poor(Table 4.9)Most U.S.trade partners operate similarly Effects of U.S.tariff policy on
25、other countries:Burdens countries that specialize in the cheapest goodsBackArguments for Trade Restrictions Free-trade argument states:Long run benefits can include lower prices,higher output,income,and consumption Trade barriers prevent the economy from undergoing adjustment,resulting in economic s
26、tagnation Protectionists view:Free trade is theoretical,not applicable in real world Noneconomic benefits such as national security more than offset economic lossesJob Protection Dominant factor influencing the call for trade restrictions This view fails to acknowledge the dual nature of internation
27、al trade Studies:Trade restrictions have little or no positive effect on the level of employment in the long run Cost of preserving jobsProtection Against Cheap Foreign Labor Using tariffs to defend domestic jobs against cheap foreign labor(Table 4.10)Tariffs on imported goods equal to wage differen
28、tial Limitations of cheap-foreign-labor argument:Low wages by themselves do not guarantee low production costs(Table 4.11)Productive superiority of domestic labor Low-wage nations tend to have a competitive advantage where labor requirement is higher than other factor inputsBackBackFairness in Trade
29、:A Level Playing Field Alleged advantages for foreign firms Weak pollution control regulations;worker safety Low corporate taxes and compliance with other employment regulations High trade barriers;subsidies Arguments against levying restrictions Domestic economy benefits from trade even if foreign
30、nations impose trade restrictions Argument does not recognize potential impact on global tradeMaintenance of the Domestic Standard of Living Advocates of trade barriers Tariffs help maintain high income levels and employment Tariffs encourage home spending,which stimulates domestic economic activity
31、 Considerations in this argument:All nations cannot levy tariffs to bolster domestic living standards Possibility of retaliatory tariffsProduction Costs Equalization Scientific tariff Eliminate unfair competition from abroad Imposition of tariffs equivalent to the cost differential Problems associat
32、ed with scientific tariff Cost comparison not achievable due to differences in costs from business to business Approximates prohibitive tariff Contradicts the notion of comparative advantage Infant-Industry Argument Temporarily shield newly developing industries from foreign competition Does not den
33、y the validity of the case for free trade Argument must be qualified in several respects:Elimination challenges for the protective tariff imposed Difficulty in determining the comparative advantage capability of industries Argument is not valid for mature,industrialized nations Other ways of insulat
34、ing a developing industryNoneconomic Arguments National security argument Heavy dependence on foreign suppliers Cultural and sociological considerations These arguments constitute legitimate reasons Most arguments justifying tariffs Based on the assumption that national welfare,as well as the indivi
35、duals welfare,will be enhancedPolitical Economy of Protectionism Bias in the political system that favors protectionism Protection-biased sector consists of:Import competing companies Labor unions representing workers in that industry Suppliers to the companies in the industry Free-trade-biased sect
36、or comprises Exporting companies Their workers Their suppliers as well as consumersPolitical Economy of Protectionism U.S.protection policies dominated by special interest groups that represent producers Interest of the domestic producer tend to outweigh that of the domestic consumer Import-competin
37、g producers tend to exert stronger influence on legislators than do export producersContinuedA Supply and Demand View of Protectionism Supply of protection is dependent on:Costs to society Political importance of the import competing industry Adjustment costs Public sympathy Factors underlying domestic industrys demand for protectionism:Comparative disadvantage Import penetration Concentration Export dependence
