2. 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
Tariffs
3. Defining tariffs
• A tariff is a tax (duty) levied on products 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 (no longer important in industrial
countries)
Tariffs
4. Types of tariff
• Specific tariff
– Fixed monetary fee per unit of the product
• Ad valorem tariff
– Levied as a percentage of the value of the product
• Compound tariff
– A combination of the above, often levied on finished
goods whose components are also subject to tariff if
imported separately
Tariffs
5. Effective rate of protection
• The impact of a tariff is often different from
its stated amount
• The effective tariff rate measures the total
increase in domestic production that the
tariff makes possible, compared to free
trade
Tariffs
6. Effective rate of protection (cont’d)
• When tariff rates are low on raw materials
and components, but high on finished
goods, the effective tariff rate on finished
goods is actually much higher than it
appears from the nominal rate
• This is referred to as tariff escalation
Tariffs
7. Avoiding and postponing tariffs
(US)
• Production sharing and special treatment for
foreign assembly
• Bonded warehouses
• Foreign trade zones
Tariffs
8. Tariff welfare effects
• Consumer surplus
– The difference between the price buyers would
be willing to pay and what they actually pay
• Producer surplus
– The revenue producers receive above the
minimum amount required to induce them to
produce a good
Tariffs
12. Who pays for import restrictions?
• Domestic consumers face increased costs
– Low income consumers are especially hurt by
tariffs on low-cost imports
• Overall net loss for the economy (deadweight
loss)
• Export industries face higher costs for inputs
• Cost of living increases
• Other nations may retaliate, further restricting
trade
Tariff effects
13. 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
Reasons for tariffs
14. 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
Reasons for tariffs
15. 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
Reasons for tariffs
