This document discusses tariffs and their economic effects. It defines tariffs as taxes on imports and describes different types of tariffs such as ad valorem and specific tariffs. The document then analyzes the consumption, production, trade, and revenue effects of imposing a tariff using a partial equilibrium model. It also discusses the impact of tariffs on consumer and producer surplus. Finally, it provides an example comparing the effects of a tariff versus an import quota.

1. TARIFF RESTRICTION
Tariff is the tax charged by import. It may be ad veloem (% in per unit
price) or fix amount

2. Tariff
 It is tax charged by import of commodity traded
it across national boundary
 It is important type of trade restriction
 Tariff can be ad valorem, specific or compound
 Ad valorem is fixed % of the value of traded
commodity
 Specific tariff is fixed sum per physical unit
 A combination of an ad valorem and specific
tariff

3. Partial equilibrium analysis

4. Effects of imposing Tariff
Consumption effect
Reduction in domestic consumption
Production effect
Expansion of domestic production
Trade effect
Decline in imports
Revenue effect
Revenue collected by the government

5. Partial equilibrium analysis
 Before tariff
 For nation 2 at price $1
 consumption was 70X
 domestic production was 10X
 import was 60 X
 No tariff on import
 After 100% ad valorem
 price is $2
 $1 is tariff and $1 is import price
 consumption is 50x (GH)
 30X import and 20X produced domestically
 tariff revenue is $30 ($1 per unit)

6. Effects of imposing Tariff
 Resulting Effects ofTariff
 Consumer surplus is the difference between what
consumers would be willing to pay and what they
actually pay.
 Imposition of a tariff reduces consumer surplus.
 Increase in producer surplus, or rent, is the
payment that need not be made in the long run to
induce domestic producers to supply additional
goods with the tariff.
 Also called subsidy effect of tariff.

7. General equilibrium analysis in a
small country
 Small country which impose a tariff but not
affect the process of world market
 Domestic price of the importable commodity will
rise by the amount of the tariff for individual
producer and consumer in a small nation.
 The nation itself collect tariff. E.g. price is $1 and
ad volerom is 100% so consumer will pay $2 if it
is domestically produced of imported.
 The price of X for individual and world market
are same i-e $2.

8. Measuring of effective cost
 We can find the effective cost by following formula
ai=imported input/final price
 g=the rate of effective protection to producers of the final
commodity
 t= the nominal tariff rate on consumers of the final commodity
 ti=the nominal tariff rate on the imported input
 ai = the ratio of the cost of the imported input to the price of the
final commodity in the absence of
g =
t - aiti
1 - ai

9. Stolper-samulelson theorem
 An increase in the relative price of a commodity
(for example, as the result of a tariff) raises the
return of the factor used intensively in production
of the commodity.
 Thus, the real return to the nation’s scarce factor
of production will rise with the imposition of a
tariff.
 Scare factor (which a country is imported) will
raise the return of production with the
imposition of tariff.

10. Stolper-samulelson theorem
 E.g. N-2 (scare of labor) impose a tariff on X.
 commodity (labor intensive) so prices of X
(px/py) will raise and so labor wages (w/r) will
rise.
 Because increase in wages will leads the prices
higher.
 The share of labor in N2 increase but because of
increasing in wages (income of labor) decrease
the national income (reduced by tariff).
 Thus demand of capital decrease and the k price.
I-e interest decrease.

11. General Equilibrium Analysis of a Tariff in a
Large Country
 Here we utilize the offer curves
 A tariff causes the imposing nation’s offer curve to shift
or rotate toward the axis measuring the importable
commodity by the amount of the tariff.
 After tariff, importer want to charge tariff in high prices
 High prices affect world market prices (large nation)
 The rise and fall of welfare depends on the effect of
trade.
 In small country the trade curves remains unchanged
 thus the welfare also decline.

12. General Equilibrium Analysis of a Tariff in a Large
Country

13. General Equilibrium Analysis of a Tariff in a Large
Country
 Under these circumstances, for a large nation:
 A reduction in trade volume will reduce welfare
 An improvement in terms of trade will increase
welfare
 Whether welfare actually rises or falls depends on
net effect.

14. CHAPTER 2
Non tariff trade restrictions

15. Nontariff trade barriers
 Quota
 Quota has important restriction of trade
 it is a direct quantitative restriction on the amount of a
commodity allowed to be imported or exported.
 western nations used quota to protect agriculture and stimulate
the export of manufactured products

16. Quota
 Before quota Price was $1 while consumption was 70X
 After tariff
 price goes to $2
 consumption reduce to 50X
 Import reduces to 30X and domestically 20X are
producing
 if demand increase the price will increase and
domestically production will increase and the import will
remains unchanged

17. Comparison of quota with tariff
 Quota increase domestic price
 increase domestic production with improvement in demand.
 Tariff leaves price and production, but increase in import and
consumption.
 Import quotas limit import to a specialized level while import
doesn’t specify the import and uncertain the import.
 Import level is distributed by Govt on official judgment and
action to avoid the monopoly.
 In import foreign exporter increases their efficiency (price) or
by accepting lower profit which falls import.
 But they can’t reduce the export in quota which is less than
anticipated.

18. Other Nontariff Barriers and the New Protectionism
 Voluntary export
 It is the most important trade barriers
 In this case the importing countries induce (under the
threat of higher around trade restriction) the exporter country
to limit their export that country
 US negotiated with Japan in 1980 to limit their
export in which US save 44000 jobs in auto industry.
 But the total cost of consumer was $15.7bn from
1981—1981
 The cost of one job was more than $100,000

19. Technical, Administrative, and
Other Regulations
 Safety regulations:
 for automobiles and electronics
 Health regulations:
 for hygienic production and packaging of imported food
products
 Labeling requirements:
 showing origin
 Many regulations serve legitimate purposes, some thinly veiled
disguises for restricting imports.

20. International cartels
 International cartels are organizations of suppliers and
exporters located in different countries
 They are agree to restrict output and exports
 aiming to increase the price or total profits of
organization
 It is not only under the control of domestic country
 Examples are
 OPEC: a cartel of major oil countries which restricts
production and exports of oil.
 International transport association

21. Dumping
 It is the export of a commodity at a lower price than abroad or
price below then cost.
 Dumping may be persistent, predatory and sporadic
 Persistent dumping or international price discrimination is
continues tendency of a domestic monopolist to maximize
total profits by selling the commodity in a higher price in
domestic market
 Predatory is temporary sale of a commodity at a lower price
abroad in order to drive foreign producers out of business.
 Sporadic dumping is the occasional sale of commodity at
below cost or at a lower price abroad than domestically in
order to unload temporary surplus of the commodity

22. Export subsidies
 It is payment of relief in tax in order to
stimulate export.
 It is illegal in international agreement.

23. CHAPTER 3RD
Economic integration

24. Economic integration
 Economic integration refers the commercial policy
of discriminately reducing or eliminating barriers
to trade between a select group of countries

25. Dimensions of economic
integration
 It is an agreement among countries in which
member countries provide lowest barriers to
each other
 The loosest form of economic integration
 They give preferential access to certain products
from the participating countries which is done by
reducing tariffs.
 E.g. Pakistan- Indonesia (PAT), British common
wealth preference scheme.

26. Free trade areas
 In which removed all trade to member’s
countries but still barriers to nonmembers of
each member.
 The North American FreeTrade Agreement
(NAFTA) is a free trade area
 Custom unions
 It is Agreement between two or more
countries to remove trade barriers and to
reduce or eliminate custom duties on mutual
trade

27. Common market
 It also allows the free movement of labor and capital
among member nations.
 EU achieve the status of common market.
 Economic unions
 It is harmonization of economic and fiscal policies
 Economic unions can also require the coordination
of various social, fiscal and monetary policies among
participating countries
 It is a most advanced type of economic integration.

28. Trade creation
 It occurs when some domestic production in a
nation that is a member of the customs unions is
replaced by lowest-cost imports from another
member nation
 If a nation which is member of union import from
another member country, there will be no tariff
revenue and consumer welfare will increase
 The consumption will remain same.
 It also increase the welfare of greater
specialization based on comparative advantage

29. Trade creation

30. Illustration
 Before formation of unions,
 N2 consumer (GH) 50X with the price of $2 in which
import was (JH) and domestic production was (JG).
 Nation2 collect $30 revenue before formation of
custom union
 N-2 doesn’t import from N-3 because the domestically
price there is 1.5 and after 100% ad veleorm and tariff
inclusive price will be Px>2.
 After joining union N-2 will consumer 70X with the
price of $1.
 The tariff revenue will be disappearing and the
domestic consumer welfare will increase.

31. Trade diversion
 It is when a member country replaced an import of
lowest-cost from outside the union by the higher-cost
import from member country.
 It reduces the welfare by itself because it shifts
production from more efficient producers outside to less
efficient user inside union
 The welfare of nonmember can be expected to decline
because their economic resources can only be utilized
less efficiently
 than before trade was diverted away from them

32. Trade diversion

33. Trade diversion
 Before diverting of N2 from N1 to N3
 N2 consumption was 50X (20 domestically and 30 import)
 Price was $2 (price with 100% tariff ad-velerom)
 Price of X in N! is $1 but 100% ad velorem
 Revenue of N-2 was $ 30

 After custom union with N3
 No tariff, no revenue
 Price domestically is $1.5
 Consumption is 60X, (15X domestically produced and 45X imported)
 N2 divert import from N1 to N3 (less efficient producer)
 N1 discrimination for union
 Trade diverting also create some trade creation

34. Theory of second best
 It states that if all the conditions required
maximizing welfare or reach Pareto optimum
can’t be satisfied, trying to satisfy as many of
these conditions as possible doesn’t
necessarily or usually lead to the second best
position.

35. Conditions likely to increase
welfare
 The greater probability will be of trade custom union to
create trade among countries rather than divert trade from
nonmembers to members, if higher pre-union trade barrier
is.
 The lower are the custom union barrier with other countries
 The greater of the countries forming unions. Probability of
falling low-cost producer within unions.
 The union is more competitive (benefit to consumers
because of cut down prices)
 Countries should be closed geographically to each other
(cost will be low)

36. Static welfare effects of custom unions
 Administration cost saving from eliminating customs3
Dynamic welfare effects
 Increased competition (cut down pricing, innovations)
 Stimulus to investment (to take advantage of large
market and met the increased competition)
 Free community of labor and capital (efficient utilization
of resources of the entire community)
 Dynamic is much better the static