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tariff

Page history last edited by Brian D Butler 15 years, 1 month ago

 

Tariff

 

a tax on imported goods, which raises the price.  This is one of the more popular trade barriers

 

Types:

 

  1. Specific tariff (a fixed $ amount on each unit imported)
  2. Ad valorem tariff (a % of the value).  Note that the US average ad valorem tax is approximately 3% on all products.

 

Table of Contents:


 

 

 

 

 

Effects:

  • raises the price of imported goods
  • raises the prices of good in importing country, and lowers it in the the exporting country.
  • government gets money from tax
  • reduces the number of imports
  • decreased worldwide efficiency (production distortion + consumption distortion)
  • possible terms of trade gain (if importing country is large enough to drive down world wide prices with Tariff).

 

Purpose:

  • protect national industry
  • raise money for government

 

Economics of Protectionism

 


Tariffs and Protectionism - Watch more funny videos here 

 

 

Compare with:

 

 

 

                                         Price impact                                                  Impact on local                                        Net Impact on

                            for importers         for exporters             Consumers         Producers        Government                Country as whole

tariff                      increases              decreases*                large loss            small gain        large gain                depends on size of terms of trade gain

 

export subsidy       decreases             increases                    small loss            large gain        massive cost            negative (always)

 

import quota           increases             decreases                   large loss            small gain         none**                  depends on size of terms of trade gain

 

 

* only if importer is large country that can influence world prices, and terms of trade

** quota benefit goes to foreigners who benefit from quota rents...excess profits from holding import quota licenses

 

 

Mercosul - common import tariff

 

The Camex (Câmara de Comércio Exterior - Exterior Chamber of Commerce) inside announced the reduction of the tax of importation for 328 machines and equipment and of four good of computer science and telecommunications of the rule of former-tariff. The former-tariff one is a norm that allows the reduction of costs for purchase of some products that are not produced in Brazil. In the case of the machines, the average reduction of the TEC (Tarifa Externa Comum do Mercosul -- Common External Tariff of the Mercosul) is of 14% for 2%. For the other goods, it is of 20% for 2%.

 

 

 

 

 

 

 

Economic analysis

 

Some economic theories hold that tariffs are a harmful interference with the individual freedom and the laws of the free market. They believe that it is unfair toward consumers and generally disadvantageous for a country to artificially maintain an inefficient industry, and that it is better to allow it to collapse and to allow a new one to develop in its place. The opposition to all tariffs is part of the free trade principle; the World Trade Organization aims to reduce tariffs and to avoid countries discriminating between other countries when applying tariffs.

 

In the following graph we see the effect that an import tariff has on the domestic economy. In a closed economy without trade we would see equilibrium at the intersection of the demand and supply curves (point B), yielding prices of $70 and an output of Y*. In this case the consumer surplus would be equal to the area inside points A, B and K, while producer surplus is given as the area A, B and L. When incorporating free international trade into the model we introduce a new supply curve denoted as SW. This curve makes the assumption that the international supply of the good or service is perfectly elastic and that the world can produce at a near infinite quantity at the given price. Obviously, in real world conditions this is somewhat unrealistic, but making such assumptions is unlikely to have a material impact on the outcome of the model. In this case the international price of the good is $50 ($20 less than the domestic equilibrium price).

 

As a result of this price differential we see that domestic consumers will import these cheaper international alternatives, while decreasing consumption of domestic made produce. This reduction in domestic production is equal to Y* minus Y1, thus reducing producer surplus from the area A, B and L to F, G and L. This shows that domestic producers are unambiguously worse off with the introduction of international trade. On the other hand we see that consumers are now paying a lower price for the goods, which increases the consumer surplus from the area A, B and K to a new surplus of F, J and K. From this increase in consumer surplus we see that some of this surplus was, in fact, redistributed from producer surplus, equal to the area A, B, F and G. However, the net societal gains from trade, in terms of net surplus, are equal to the area B, G and J. The level of consumption has increased from Y* to Y2, while imports are now equal to Y2 minus Y1.

 

Let’s say we now introduce a tariff of $10/unit on imports. This has the effect of shifting the world supply curve vertically by $10 to SW + Tariff. Again, this will create a redistribution of surplus within the model. We see that consumer surplus will decrease to the area C, E and K, which is a net loss of the area C, E, F and J. This now makes consumers unambiguously worse off than under a free trade regime, but still better off than under a system without trade. Producer surplus has increased, as they are now receiving an extra $10 per sale, to the area C, D and L. This is a net gain of the area C, D, F and G. With this increase in price the level of domestic production has increased from Y1 to Y3, while the level of imports has reduced to Y4 minus Y3.

 

The government also receives an increase in revenues as a result of the tariff equal to the area D, E, H and I. In dollar terms this figure is essentially $10*(Y4-Y3). However, with this redistribution of surplus we do see that some of the redistributed consumer surplus is lost. This loss of surplus is known as a deadweight loss, and is essentially the loss to society from the introduction of the tariff. The deadweight loss is equal to the areas E, I and J plus D, G and H. The area D, G and H represents a loss in efficiency as domestic consumers end up with too little of the good. The area E, I and J represents a loss in efficiency as too much of the good is being supplied by the less efficient, domestic producers

 

The model above is only completely accurate in the extreme case where none of the consumers belong to the producers group and the cost of the product is a fraction of their wages. If instead, we take the opposite extreme, and assume all consumers come from the producers group, and also assume their only purchasing power comes from the wages earned in production and the product costs their whole wage, then the graph looks radically different. Without tariffs, only those producers/consumers able to produce the product at the world price will have the money to purchase it at that price. The small FGL triangle will be matched by an equally small mirror image triangle of consumers still able to buy. With tariffs, a larger CDL triangle and its mirror will survive.

 

Note also, that with or without tariffs, there is no incentive to buy the imported goods over the domestic, as the price of each is the same. Only by altering available purchasing power through debt, selling off assets, or new wages from new forms of domestic production, will the imported goods be purchased. Or, of course, if its price were only a fraction of wages.

In the real world, as more imports replace domestic goods, they consume a larger fraction of available domestic wages, moving the graph towards this view of the model. If new forms of production are not found in time, the nation will go bankrupt, and internal political pressures will lead to debt default, extreme tariffs, or worse.

 

Moderate tariffs would slow down this process, allowing more time for new forms of production to be developed.

 

 

Infant industry argument

Some proponents of protectionism claim that imposing tariffs that help protect newly founded infant industries allows those domestic industries to grow and become self sufficient within the international economy once they reach a reasonable size.

 

In a free market economic system, the tariff establishes the borders or boundaries of the system, because as defined by free market economics, the absence of tariffs is a requirement of a free market economic system. The establishment of tariffs create a border of protection around the free market economy, and within that free market area, no tariffs can be established.

 

The four requirements of a free market economic system, as defined by Ludwig Von Mises, are private property, a coercive government, the absence of institutional interferences within the system, and the division of labor.

 

 

Revenue argument

Critics of free trade have argued that tariffs are especially important to developing countries as a source of revenue. Developing nations do not have the institutional capacity to effectively levy income and sales taxes. In comparison with other forms of taxation, tariffs are relatively easy to collect. The trend of lifting tariffs and promoting free trade has been argued to have had disproportionately negative effects on the governments of developing nations who have greater difficulty than developed nations in replacing tariffs as a revenue source.

 

See also

General Agreement on Tariffs and Trade GATT

 

External links

 

 

 

 

 

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