Import tariffs

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Import tariffs

Jan J. Michalek

Trade policy & tariffs



Trade policy: aiming at changing pattern and volume of international trade.



Export, transit and import tariffs



 Only import duties are applied;



Specific versus ad valorem duties;



Tariffs: the oldest & the most important

instrument of trade policy

(2)

Tariffs, quota's, and other trade restrictions

Remaining tariff as % of 1930 tariff

0 10 20 30 40 50 60

1945 1955 1965 1975 1985 1995

There are many types of trade restrictions, e.g. specific tariffs, ad valorem tariffs, quota, subsidies, prohibitions, minimum content, etc.

Multilateral rounds by GATT/WTO have reduced the tariff levels considerably

Small country: Equilibrium under free trade: partial equilibrium analysis

z

q

P A

p

0 q₀ q 4

P W

D S

 JJ Michalek

(3)

Implications of tariff imposition:

small country perspective

z

y

x z

q

P A

p

t

a b c d

0 q 0 q₁ q 3 q₄ P W+t

P W

D S

 JJ Michalek

Producer’s surplus

b a

q

P2

p

C B

0 q1 q2

P₁

A

S

Price up  surplus incresed by area of b

 JJ Michalek

(4)

Consumer’s surplus

b a

q

P2

p

C B

0 q1 q2

P1

A

D

Price up (fom P1 to P2)  Surplus down by area b

Tariffs and partial equilibrium; small country

International Trade & the World Economy;  Charles van Marrewijk

quantity demand

supply price

q₀ q₁ q₂ q₃ q₄

p₀ p₀(1+t)

p₂

imports without tariff imports with tariff

tariff

increase producer surplus net loss; Harberger triangles decrease consumer surplus government revenue

a b c _d

(5)

Welfare changes: small country



Welfare changes resulting from tariff imposition:



Producer’s surplus: +a



Consumer’s surplus: - (a+b+c+d)



Fiscal revenues : +c



 Changes in net welfare: - (b+d)

 JJ Michalek

Tariffs and partial equilibrium; large country

quantity demand

supply price

q ₀ q ₁ q ₂ q ₃ q ₄ p ₀

p ₁(1+t) p ₂

imports without tariff imports with tariff

tariff p ₁

increase producer surplus

= net loss; possible gain decrease consumer surplus

government revenue -/-

a _b c _d

e

(6)

Welfare changes: large country

 Welfare changes resulting from tariff imposition:

 Producer’s surplus: +a

 Consumer’s surplus: - (a+b+c+d)

 Fiscal revenues : +c+e

 Of which terms of trade effect: +e

  Changes in net welfare: e-(b+d)

Optimal duty: graphic illustration

Yaut

Rmax

Y max Real income

Fiscal revenues from duties

Level of duty tp

tr

topt

0

Income from duties

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Small country: general

equilibrium under free trade

 JJ Michalek

KF

KM

Ua

P

QF

QM P

0 F

M

Df

Uf

Kf

Qf

Slope –PM/PF

(terms of trade)

Small country:

general equilibrium

KFf

B A

Ut

Ua

Q QF1

QF0

KMf QM1 QM0 Q

0 F

M

Dt

Df

Uf

Kt

Kf

Qt

Qf

Slope -P^TM/P^TF

(terms of trade) Slope

-PM/PF+t

 JJ Michalek

(8)

Infant industry protection

q5

q4

e

t

q3 Q

P

q₂ q1

O b

c d a

P_W+t PW

S^' D S

Tariffs in the USA

0 10 20 30 40 50 60

1820 1870 1920 1970

tariff revenue / import value

tariff of

Abominations Morrill and

War tariffs Haw ley-

Smoot Fordney-

McCumby

Kennedy

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Protectionism & market imperfections (production externalities)

Q4

Q3

H I

Q P

Q2

Q1

O G

F D E

C A B PW

PW(1+t) PW(1+t)

PW

Sh'

Sh

Dh

- Curve Sh : private marginal cost; Sh': social marginal cost;

- Welfare benefits from protectionism exist when CID>BEF

 JJ Michalek

Protectionism & market imperfections (consumption externalities)

B

Q4

Q3

H Q P

Q2

Q1

O G

F D E

C A PW

PW(1+t) PW(1+t)

PW

Dh'

Sh

Dh

- Dh: measuring private utility from consumption - Dh': measuring social utility from consumption Protectionism increases welfare if: EFH>ACD

 JJ Michalek

(10)

Tariff profile by income and technology content

Conclusions from tariff analysis

• There are many different types of trade restrictions

• Imposing tariffs leads to winners (some producers and the government) and losers (other producers, consumers, and abroad)

• Net welfare is negative if the country is ‘small’ (efficiency loss, Harberger triangles)

• Net welfare effect is potentially positive if the country is ‘large’

(= can influence the world relative price level; ‘optimal’ tariff)

• Net welfare effect also negative for large country with retaliation

•Infant industry protection: welfare can be (in principle) increased

•Market imperfections can provide weak argument for protectionism (only second best policy)

 JJ Michalek