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Week 6: barriers and tariffs
Transcript of Week 6: barriers and tariffs
What is a tariff?
Objective of tariffs
Types of tariffs
Effective rate of protection
Avoidance and evasion of tariffs
Model of the small nation
Model of a big nation
What opinions do you have about tariffs?
Tariffs and poverty
The political economy of protectionism
Free trade is a suported practice ... Why?
Who supports it?
Who criticizes it?
The effective rate of protection
It is characterized by being focused on intermediate and finished products. Usually carried out by developed countries. Why?
Tariffs and non-tariff barriers
The quotas against tariffs
Domestic content requirements
Does the anti-dumping law is unfair?
Other non-tariff barriers
Non-tariff barriers to trade
Let's define a tariff
The most popular ones
A tariff is a tax levied on a product when it crosses national boundaries and normally only applies to imports
Protect national production → Protectionism
Tax collection mechanism.
Evolution of tariffs -> Reduction over time
Ad valorem tariff
Fixed percentage of the value of the imported good (e.g. 10% of the worth of the computer)
Combines the elements of specific and ad valorem tariffs (e.g. $20 plus 10% of the worth of the computer)
Dodging Import Tariffs: Tariff Avoidance and Tariff Evasion
What is the difference between avoidance and evasion?
Result of avoidance → Free Zones
Stimulate international trade, attract industry, create jobs .. Anything else?
Tax and tariff benefits
Effects of tariffs on welfare.
Tariff Welfare Effects: Small-Nation Model
To measure the effects of a tariff on a nation’s welfare, consider the case of a nation whose imports constitute a very small portion of the world market supply. This small nation would be a price taker, facing a constant world price level for its import commodity. This is not a rare case; many nations are not important enough to influence the terms at which they trade.
The tariff’s revenue effect represents the government’s collections of duty. Found by multiplying the number of imports (20 units) times the tariff ($1,000), government revenue equals area c, or $20,000.
The redistributive effect is the transfer of the consumer surplus, in monetary terms, to the domestic producers of the import-competing product. This is repre- sented by area a, which equals $30,000..
Area b, totaling $10,000, is referred to as the protective effect of the tariff. It illustrates the loss to the domestic economy resulting from wasted resources used to produce additional autos at increasing unit costs.
The consumption effect, represented by area d, which equals $10,000, is the residual not accounted for elsewhere.
Like the protective effect, the consumption effect represents a real cost to society, not a transfer to other sectors of the economy. Together, these two effects equal the deadweight loss of the tariff (areas b + d in the figure).
What is your opinion about tariffs?
The political economy of protectionism
Tariffs and the poor
Damages to exporters. Why?
1. Exporters buy (more expensive) imported inputs
2. Increase the cost of living
3. Increase the tariff, thus lowering foreign exports, reducing their purchasing power to import exported products from the local country.
Net loss of welfare to the economy
Tariffs are applied often on the cheapest and / or lower quality products.
Are tariffs bad?
Free trade works better in theory than in practice.
Protection to local employment
To compete on equal terms
Infant industry protection
National security (no dependence)
Cultural and sociological considerations)
What happens in Colombia?
Political factors about protectionism
Dealing with conflicts of interest
Sector biased towards protectionism
Sector biased towards free trade
Global quota: a specific number of products being imported each year regardless of the country they come from.
Selective quota: a specific volume of products must come from a specific number of countries.
Control over the imports and can vary from country to country.
Quotas Versus Tariffs
This device allows a specified number of goods to be imported at one tariff rate (the within-quota rate), whereas any imports above this level face a higher tariff rate (the over-quota rate).
Tariff-Rate Quota: A Two-Tier Tariff
Its main purpose is to moderate the intensity of international competition, allowing less efficient domestic producers to participate in markets that would other- wise have been lost to foreign producers that sell a superior product at a lower price.
Domestic Content Requirements
Is Antidumping Law Unfair?
Do you remember?
What are they?
Subsidizing domestic production -> encourages domestic production
International price discrimination. What does it consist of?
Selling at prices below the market price or to sell at prices below the cost of production.
Sporadic dumping (distress dumping)
Occurs when a firm disposes of excess inventories on foreign markets by selling abroad at lower prices than at home. This form of dumping may be the result of misfortune or poor planning by foreign producers.
As its name suggests, goes on indefinitely. In an effort to max- imize economic profits, a producer may consistently sell abroad at lower prices than at home. The rationale underlying persistent dumping is explained in the next section.
Occurs when a producer temporarily reduces the prices charged abroad to drive foreign competitors out of business. When the producer succeeds in acquiring a monopoly position, prices are then raised commensurate with its market power. The new price level must be sufficiently high to offset any losses that occurred during the period of cutthroat pricing.
Why should we regulate dumping?
Based on the margin of dumping: the value of overseas market price exceeds the local market.
It is defined from:
Price: sold below the price charged by the local market
1. The cost of manufacturing the goods
2. General expenses
3. Gain on sales in the home market
4. Cost to pack the goods to ship it to the destination country
Its initial goal is to level the playing field for all market players.
It is the result of a high trade liberalization leading to taking new measures to protect national interests.
The way dumping is calculated
The impact of the exchange rate
Other Nontariff Trade Barriers
Restrictions on shipping and freight
What do you think?
Difficulties in the loading and unloading of goods in ports make products more expensive
Government procurement policies
The purchasing power of governments and a preference for buying locally.
Effects: less efficient domestic producers. Why?
To correct undesirable side effects of the economy.
Environmental quality. What implications does it generate?
According to neoclassical trade theory tariffs and non-tariff barriers will have a negative impact on social welfare
The theory of comparative advantage and the factor endowment theory state that free trade is beneficial for all countries
According to these theories social welfare will thus be lower if counties introduce barriers to trade
However, some groups within countries might loose because of free trade and we have seen that some of the assumptions in the theory are not very realistic
Countries thus might introduce barriers to free trade to support (infant) industries or to protect certain groups
There exists also the tendency to retaliate (i.e. if one countries enacts a barrier another country does the same)
To avoid the implied costs of this behavior countries have increasingly signed free trade agreements to ensure that trade barriers are declining
Designed to generate additional funds for domestic government (sometimes to decrease inequality: tariff on luxury goods)
Designed to reduce the amount of imports entering a country; increase sales for domestic producers
There are three types of tariffs
Fixed monetary amount per unit of the imported good
(e.g. $100 per computer)
It has no protectionist effect. It discourages cheap imports and promotes the expensive ones. It is ideal during recessions. Why?
Depends not only on the tariff for a certain product but as well on the tariff on inputs that domestic producers use
U.S. trade policy includes an offshore-assembly provision (OAP) that provides favorable treatment to products assembled abroad from U.S.-manufactured compo- nents. Under OAP, when a finished component originating in the United States (such as a semiconductor) is sent overseas and assembled there with one or more other components to become a finished good (such as a television set), the cost of the U.S. component is not included in the dutiable value of the imported assembled article into which it has been incorporated.
Tariff Welfare Effects: Consumer Surplus and Producer Surplus
Long story short: If the country is large, the effect is different: a tariff increases the price at home but decreases the price in the foreign market.
Next to tariffs, countries also can introduce non-tariff barriers, which are nowadays widely used to protect domestic industries
What do you think?
A quota that defines the maximum volume of imports and charges the within-quota tariff
And... an over-quota tariff
To limit the practice of outsourcing, organized labor has lobbied for the use of domestic content requirements.
Trade justice - why world trade rules need to change