Tariffs.ppt

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1、Tariffs,Copyright 2009 South-Western, a division of Cengage Learning. All rights reserved.,Tariffs,definition tax levied on a good when it crosses a national border import tariff much more common export tariff less common; revenue source purposes protective tariff designed to reduce the amount of im

2、ports entering a country; increase sales for domestic producers revenue generation designed to generate additional funds for domestic government,Types of Tariffs,specific tariff fixed monetary amount per unit of the imported good ad valorem tariff fixed percentage of the value of the imported good c

3、ustoms valuation process of determining the value of an imported good free-on-board (FOB) valuation tariff applied as product leaves country cost-insurance-freight (CIF)valuation tariff applied as product enters country compound tariff combines the elements of specific and ad valorem tariffs,Tariff

4、Examples by Country and Industry,Effective Rate of Protection,nominal tariff rate based on tariff applied to value of finished product effective tariff rate based on tariff applied to finished product and imported inputsn = nominal tariff rate on final producta = ratio of value of imported input to

5、value of finished product (prior to tariffs)b = nominal tariff rate on imported input,effective rate of protection = e =,Effective Rate 1st Example,for this example:n = $50/($100 + $400) = 0.1 = 10%a = $400/($100 + $400) = 0.8b = $0/($400) = 0,Effective Rate 2nd Example,in this case:n = $50/($100 +

6、$400) = 0.1 = 10%a = $400/($100 + $400) = 0.8b = $20/($400) = 0.05 = 5%,Tariff Escalation,tariff escalation higher tariffs on intermediate and finished goods and lower tariffs on raw materialsincentive for developing nations to expand production of raw materialsdisincentive for developing nations to

7、 compete in market for finished goods,Offshore Assembly Provision (OAP),outsourcing aspects of production process occur in another country low cost, labor intensive products OAP tariffs applied only to portion of production occurring in another country reduces effective tariff rate for domestic cons

8、umers incentive for foreign producers to use U.S. components in production detrimental to U.S. workers who also produce the same finished goods,Dodging Import Tariffs,tariff avoidance legal method of reducing or eliminating the amount paid in tariffsexample: Brazilian raw sugar shipped to Caribbean

9、and refined there into ethanol then imported to the U.S. duty free tariff evasion illegal means of reducing or eliminating tariffsexamples:false reclassification of productsfalsification of country of originaltering composition of product itself,Postponing Import Tariffs,Bonded Warehouse location ma

10、intained by importers ensuring that all customs obligations will be satisfied goods may be stored for maximum of 5 years requires inspection by U.S. Customs Service Foreign-Trade Zone U.S. site at which foreign merchandise can be imported without immediate payment of duties or tariffs does not requi

11、re inspection by U.S. Customs,Consumer & Producer Surplus,1) consumer surplus additional benefit obtained by the buyer of a good difference between the maximum that the buyer is willing to pay and the actual price area below demand and above price 2) producer surplus additional benefit obtained by t

12、he seller of a good difference between the minimum that the seller is willing to accept and the actual price area above supply and below price,Consumer & Producer Surplus (cont.),When combined, the areas of consumer surplus and producer surplus represent the total welfare to the nation resulting fro

13、m the sale of this good.,Tariff Welfare Effects Small Nation,Before Trade: U.S. consumer surplus is area in red.U.S. producer surplus is area in green.,Tariff Welfare Effects Small Nation,With Free Trade: Consumer surplus increases by areas a,b,c,d,e,f and g.Producer surplus decreases by areas a and

14、 e.The overall increase in welfare is b,c,d and f.,Tariff Welfare Effects Small Nation,With Tariff: c = revenue effect = lost consumer surplus now government rev.a = redistributive effect = shift from consumer to producer surplusb + d = deadweight loss = benefits lost to all partiesb = protective ef

15、fectd = consumption effect,Tariff Welfare Effects Large Nation,Before Trade: U.S. consumer surplus is area in redU.S. producer surplus is area in green.,Tariff Welfare Effects Large Nation,With Free Trade: Consumer surplus increases substantially.Producer surplus decreases but to a lesser degree.The

16、 overall increase in welfare is b,c,d and the triangle above.,Tariff Welfare Effects Large Nation,With Tariff: c + e = revenue effect = consumer surplus now government rev. a = redistributive effect = shift from consumer to producer surplus b + d = deadweight loss = benefits lost to all partiesb = p

17、rotective effectd = consumption effect above.,Tariff Welfare Effects Large Nation,Revenue Effect: In this case there are two separate portions:c = domestic revenue effect = prior U.S. consumer surpluse = terms-of-trade effect = redistribution of income from foreign nationarea e (b+d) leads to more d

18、omestic welfare,Tariff Burdens on U.S. Exporters,cost of inputs: tariffs increase price of imported raw materials thus increasing the price of manufacturing using these materials making U.S. firms less competitive cost of living: tariffs lead to higher prices for U.S. consumers eventually leading to

19、 higher wages for U.S. workers international repercussions: tariffs decrease exports from other countries decreasing their income and ability to purchase U.S. exports,Tariffs and the Poor,tariffs often applied to low price products which represent large share of budgets of low-income households regr

20、essive - poor pay greater tariffs in percentage terms high end domestic producers compete based on prestige and quality rather than price so these producers do not lobby as much for greater protection from imports,Trade Restriction Arguments,job protection preserve jobs in some industries but decrea

21、se employment in others increased cost to consumer greater than average salary for worker whose job was saved cheap foreign labor productivity and cost relevant factors relevant to labor intensive production only fairness in trade level playing field other nations lack of environmental regulations r

22、esponse to trade barriers of other nations,Trade Restrictions Arguments (cont.),domestic standard of living restrictions only improve standard of living at the expense of trading partners equalized production costs scientific tariff tariff to offset cost differentials subsidizes inefficient domestic

23、 production infant industry short run protection for new domestic industries against developed foreign competition noneconomic arguments national defense and cultural considerations,Political Economy of Protectionism,protection-biased sector consists of import competing companies, their workers, and

24、 suppliers to these industries free-trade-biased sector consists of exporting industries, their workers and suppliers to these industries U.S. policy dominated by well organized special interest groups representing producers consumers generally unorganized and diverse tariff escalation effect as evi

25、dence of this imbalance,Supply & Demand of Protectionism,greater supply of protection: higher cost to society greater political importance higher adjustment costs greater public sympathy greater demand for protection: greater comparative disadvantage greater import penetration greater domestic concentration lesser export dependence,