Description
Select a developed country that has implemented a tariff, and a developing country that manufactures products that are impacted by that same tariff. The current US and China tariff war cannot be used since these are the two largest economies in the world. Investigate the impact of the trade barrier on the developing countrys business sector and quantify the impact, if possible. Would you recommend that the developed country eliminate the tariff? Explain your reasoning. Embed course material concepts, principles, and theories, which require supporting citations along with at least one scholarly, peer-reviewed reference in supporting your answer unless the discussion calls for more. Keep in mind that these scholarly references can be found in the Saudi Digital Library by conducting an advanced search specific to scholarly references. Use Saudi Electronic University academic writing standards and APA style guidelines. Required readings : Chapter 4 in International Economics(attached)Hoekman, B., & Shepherd, B. (2021). Services trade policies and economic integration: new evidence for developing countries. World Trade Review, 20(1), 115-134. Retrieved from https://www.cambridge.org/core/journals/world-trade-review/article/services-trade-policies-and-economic-integration-new-evidence-for-developing-countries/04BA024C0F1516A44099FC2856CE4602
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INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 4
Tariffs
© 2019 Cengage. All rights reserved.
2
CHAPTER OUTLINE
(1 of 3)
The Tariff Concept
Types of Tariffs
Effective Rate of Protection
Tariff Escalation
Outsourcing & Offshore Assembly Provision
Dodging Import Tariffs: Tariff Avoidance &
Tariff Evasion
Postponing Import Tariffs
© 2019 Cengage. All rights reserved.
3
CHAPTER OUTLINE
(2 of 3)
Tariff Effects: An Overview
Tariff Welfare Effects: Consumer Surplus &
Producer Surplus
Tariff Welfare Effects: Small-Nation Model
Tariff Welfare Effects: Large-Nation Model
Examples of U.S. Tariffs
How a Tariff Burdens Exporters
Tariffs and the Poor: Regressive Tariffs
© 2019 Cengage. All rights reserved.
4
CHAPTER OUTLINE
(3 of 3)
Arguments for Trade Restrictions
Would a Tariff Wall Really Protect U.S. Jobs?
The Political Economy of Protectionism
© 2019 Cengage. All rights reserved.
5
Tariffs
Free-Trade argument posits that open markets foster most
efficient use of world resources
But free trade policies often meet resistance among
companies and workers who face losses in income and jobs
because of import competition
Policymakers torn between global efficiency and needs of
voting public
© 2019 Cengage. All rights reserved.
6
The Tariff Concept
(1 of 3)
Tariff
A tax (duty) levied on a product when it crosses
national boundaries
Import tariff
Tax levied on an imported product
Most common; collected before shipment can be unloaded in
domestic port
Export tariff
Tax imposed on an exported product
Less common; illegal under U.S. Constitution
Commonly used by developing nations
© 2019 Cengage. All rights reserved.
7
The Tariff Concept
(2 of 3)
Protective tariff
Protects domestic producers from foreign
competition
Facilitates increase in output of import-competing
producers
Revenue tariff
Generates tax revenues by placing tariffs on either
imports or exports
Now only 1% of total federal revenues in U.S.
Many developing nations rely on tariffs as major source
of income
© 2019 Cengage. All rights reserved.
8
The Tariff Concept
(3 of 3) Table 4.1
Taxes on International Trade as a Percentage of Government Revenues,
2013: Selected Countries
Developing Countries
Percentage
Advanced Countries
Percentage
Bahamas
43.2
New Zealand
2.7
Ethopia
29.8
Australia
1.8
Liberia
28.1
Japan
1.7
Bangladesh
26.7
United States
1.2
Grenada
25.4
Switzerland
1.0
Russian Federation
25.8
Norway
0.3
Philippines
19.9
Ireland
0.2
India
14.1
World average
3.8
Source: From World Bank Data at http://data.worldbank.org. See also International Monetary Fund,
Government Finance Statistics, Yearbook, Washington, DC.
© 2019 Cengage. All rights reserved.
9
Types of Tariffs
(1 of 3)
Tariffs may be specific, ad valorem, or
compound
Specific tariff
Fixed amount of money per physical unit of imported
product (Ex: 15 cents/unit).
Relatively easy to apply and administer
Degree of protection varies inversely with changes in
import prices
Provides domestic producers increased protection
during recession (with falling prices)
© 2019 Cengage. All rights reserved.
10
Types of Tariffs
(2 of 3)
Tariffs may be specific, ad valorem, or
compound (cont.)
Ad valorem tariff
Primarily used with manufactured goods because can be applied
to products with range of grade variations
Fixed percentage of the value of imported product (Ex: 15%/unit)
Maintains constant degree of protection for domestic producers
through the business cycle
© 2019 Cengage. All rights reserved.
11
Types of Tariffs
(3 of 3)
? Tariffs may be specific, ad valorem, or compound (cont.)
Customs valuation: determining value of imported product; is
complex, subject to disagreement
U.S. traditionally uses free-on-board valuation (FOB)?tariff applied
to products value as it leaves exporting country
Europe traditionally uses cost-insurance-freight valuation
(CIF)?tariffs levied as percentage of imported commoditys total
value upon arrival at final destination
Compound tariff
Applied to manufactured products composed of raw
materials subject to tariffs
© 2019 Cengage. All rights reserved.
12
Effective Rate of Protection
(1 of 3)
Nominal and Effective tariff rates
Nominal tariff rate: rate published in countrys
tariff schedule
Applies to value of finished product
Effective tariff rate: takes into account not only
nominal tariff on finished good but any tariff
applied to imported inputs
© 2019 Cengage. All rights reserved.
13
Effective Rate of Protection
(2 of 3)
Effective tariff rate (e) calculated as:
( n ? ab )
e=
(1 ? a )
e = effective rate of protection
n = nominal tariff rate on final product
a = ratio of value of the imported input to value of
finished product
b = nominal tariff rate on imported input
© 2019 Cengage. All rights reserved.
14
Effective Rate of Protection
(3 of 3)
If tariff on finished product is less than tariff
on imported input
Effective rate of protection is less than nominal
tariff (may even be negative)
Tariff protects domestic suppliers of raw materials
more than domestic manufacturers
If tariff on finished product exceeds tariff on
imported input
Effective tariff exceeds nominal tariff
© 2019 Cengage. All rights reserved.
15
Tariff Escalation
Processed goods have higher import tariffs
Raw materials often imported at zero or low tariff
rates; nominal and effective protection increases at
each production stage
Tariff Escalations in Advanced and Developing Countries, 2012
AGRICULTURAL PRODUCTS
Country
Bangladesh
Uganda
Argentina
Brazil
Russia
United States
Japan
World
Primary Products
17.5
17.5
5.7
6.5
6.9
1.0
4.5
12.0
Processed Products
23.0
20.3
11.5
12.1
9.2
2.8
10.9
15.1
INDUSTRIAL PRODUCTS
Primary Products
9.1
4.2
2.9
4.2
5.3
1.3
0.5
5.6
Processed Products
15.4
11.7
9.5
10.7
9.5
2.8
1.9
7.7
Source: From World Bank Data at http://data.worldbank.org.
© 2019 Cengage. All rights reserved.
16
Outsourcing & Offshore
Assembly Provision
Outsourcing is key aspect of global economy
Ex: Electronic components made in the U.S. are shipped to
another country with low labor costs for assembly into TV sets;
assembled sets returned to U.S. for further processing or
packaging & distribution
Each production stage in country where it incurs least cost
Offshore-assembly provision (OAP)
Provides favorable treatment to products assembled abroad from
U.S.-made components
Incentivizes foreign manufacturers to purchase components from
U.S. sources
© 2019 Cengage. All rights reserved.
17
Dodging Import Tariffs:
Tariff Avoidance & Tariff Evasion
Tariff avoidance
Legal utilization of tariff system to ones own
advantage
Tariff evasion
Evading tariffs by illegal means such as smuggling
imported goods into a country
Ford strips its wagons to avoid high tariff
Ex: Ford strips its wagons to avoid high tariff
Ex: Smuggled steel evades U.S. tariffs
© 2019 Cengage. All rights reserved.
18
Postponing Import Tariffs:
Bonded Warehouse
Under U.S. tariff law, dutiable imports can be brought into
U.S. and temporarily left in a bonded warehouse, duty free
(up to 5 years)
Owners of warehouses must be bonded to ensure they will
satisfy all customs duty obligations
Bonding company guarantees payment of custom duties if
importing company unable to do so
When goods removed from warehouse, firm must pay
duty on value at time of removal
© 2019 Cengage. All rights reserved.
19
Foreign-Trade Zone (FMZ)
Area in U.S. where businesses operate without paying
duties on imported products or materials as long as they
remain in area and do not enter U.S. marketplace
In an FTZ, can do just about anything to merchandise
repair, repackage, assemble
FTZ program treats a product manufactured in FTZ as if it
were imported, not made in U.S.
Customs duties are due when goods are transferred from
FTZ for U.S. consumption
© 2019 Cengage. All rights reserved.
20
Tariff Effects: An Overview
As taxes on imports, tariffs make items more
expensive for consumers, reducing demand
Buyers pay more for U.S.-made goods than they would
for imported goods under free trade
Job loss in retail and transportation sectors that import
foreign-made goods
Job loss in any domestic industry that suffers retaliatory
tariffs
Additional costs of imported inputs passed on to
consumers through goods and services that use such
inputs in production process
© 2019 Cengage. All rights reserved.
21
Tariff Welfare Effects: Consumer Surplus
& Producer Surplus (1 of 2)
Consumer Surplus (CS)
Difference between what buyers are willing & able to pay
and the amount they actually pay
Inverse relationship between change in market price and
CS
Producer surplus (PS)
Difference between what producers are willing and able to
receive and the amount they actually receive
Direct relationship between change in price and PS
© 2019 Cengage. All rights reserved.
22
Tariff Welfare Effects: Consumer Surplus
& Producer Surplus (2 of 2) Figure 4.1
© 2019 Cengage. All rights reserved.
23
Tariff Welfare Effects:
Small-Nation Model (1 of 4)
Small nations import very small portion of
world market supply; unable to impact market
price
Is a price taker, facing constant world prices for
products it imports
Tariff effects
Raises home price of imported good by full amount of
duty
Results in higher domestic production & PS
Lowers domestic consumption & decreases CS
© 2019 Cengage. All rights reserved.
24
Tariff Welfare Effects:
Small-Nation Model (2 of 4) Figure 4.2
© 2019 Cengage. All rights reserved.
25
Tariff Welfare Effects:
Small-Nation Model (3 of 4)
A small nation tariff effects on nations
welfare:
Consumer surplus falls
Additional tax revenues
Benefits domestic producers
Wastes resources
Revenue effect (Area c)
Governments collections of duty
Redistributive effect (Area a)
Transfer of consumer surplus to domestic producers
© 2019 Cengage. All rights reserved.
26
Tariff Welfare Effects:
Small-Nation Model (4 of 4)
A small nation tariff effects on nations
welfare: (cont.)
Protective effect (Area b)
Loss to domestic economy from wasted resources used to
produce at increasing unit costs
Consumption effect (Area d)
Decrease in consumption resulting from tariffs artificially
increasing price
Deadweight loss (Area b + d)
Protective effect and consumption combined
© 2019 Cengage. All rights reserved.
27
Tariff Welfare Effects:
Large-Nation Model (1 of 3)
Tariffs may increase national welfare when imposed by
importing nation large enough that changes in its quantity
of imports influence world price (ex: U.S., Japan, EU)
U.S. imposes tariff on automobile imports
Prices increase for American consumers, quantity demanded
decreases
Effect shared between U.S. consumers, who pay higher price, and
Japanese firms, which receive lower price than under free trade
Terms of trade improve for U.S. at Japans expense
© 2019 Cengage. All rights reserved.
28
Tariff Welfare Effects:
Large-Nation Model (2 of 3) Figure 4.3
If e > (b + d)
National welfare is
increased
If e = (b + d)
National welfare remains
constant
If e < (b + d)
National welfare is
diminished
© 2019 Cengage. All rights reserved.
29
Tariff Welfare Effects:
Large-Nation Model (3 of 3)
Economic effects of an import tariff
Redistributive effect
From domestic consumers to domestic producers
Deadweight loss
Consumption effect
Protective effect
Revenue effect
Domestic revenue effect
Terms-of-trade effect
© 2019 Cengage. All rights reserved.
30
Donald Trumps Border Tax
How to Pay for the Wall
Trump wants Mexico to pay for the border
wall
Mexico refused
Trump declared a 20 percent border tax on
Mexican imports
Violated NAFTA and WTO agreements
© 2019 Cengage. All rights reserved.
31
The Optimum Tariff
& Retaliation
Optimum tariff
Maximizes positive difference between gain of
improving terms of trade (Area e) and loss in
economic efficiency from the protective effect
(Area b) and consumption effect (Area d)
Only beneficial to importing nation
Beggar-thy-neighbor policy; could invite
retaliation
© 2019 Cengage. All rights reserved.
32
Examples of U.S. Tariffs (1 of 3)
Obamas Tariffs on Chinese Tires
As condition of entry to WTO in 2001, China agreed that
other nations could clamp down on surges of imports
from China without having to prove unfair trade practices
In 20042008, China increased tire shipments to U.S. by
300%; four U.S. tire plants closed, 4,500 jobs lost; Obama
imposed tariffs for 3 more years
Obama administration maintained tariffs would enforce
rule China agreed to; significantly reduce tire imports;
boost U.S. sales, prices, profitability; and have little or no
impact on production
© 2019 Cengage. All rights reserved.
33
Examples of U.S. Tariffs (2 of 3)
Obamas Tariffs on Chinese Tires
Critics argued
Action opposed by U.S. tire firms because already had
abandoned making low-cost tires
Not profitable to produce cheap tires in U.S. because of
competition from foreign companies
To compete, U.S. manufacturers would have to revamp
factory lines to produce tires
If Chinese tires blocked, Brazil, Indonesia, others will supply,
but will take time; in meantime, will be shortages of low cost
tires in U.S. & prices rising by 2030%
Tariff produced mixed results
© 2019 Cengage. All rights reserved.
34
Examples of U.S. Tariffs (3 of 3)
Should Footwear Tariffs be Given the Boot?
During 1930s, tariffs introduced to protect rubber & canvas
shoe industry
Although other tariffs eliminated since 1930s, footwear
tariffs have continued
U.S. footwear industry now nearly extinct; almost 99% of
footwear sold in U.S. imported
Affordable Footwear Act introduced in 2013
Attempts to abolish most severe footwear tariffs and lower prices
of shoes
© 2019 Cengage. All rights reserved.
35
How a Tariff Burdens Exporters
Effects of import tariffs on exporters
Higher production costs from imported inputs and
reduction in CS
Can result in higher prices and, depending on elasticity
of demand, reduce overseas sales
Raise cost of living
International repercussions lead to reduction in
domestic exports
© 2019 Cengage. All rights reserved.
36
Tariffs and the Poor:
Regressive Tariffs (1 of 2)
Tariffs are inequitable
Impose most severe costs on low-income families
tend to be regressive
Higher tariffs imposed on cheap goods than on
luxuries
Affect different countries in different ways
Tend to burden countries (e.g., poor countries in Asia
and Middle East) that specialize in production and sale
of cheaper goods
© 2019 Cengage. All rights reserved.
37
Tariffs and the Poor:
Regressive Tariffs (2 of 2) Table 4.7
U.S. Tariffs Are High on Cheap Goods, Low on Luxuries
Product
Tariff Rate (percent)
Mens knitted shirts
Synthetic fiber
32.5
Cotton
20.0
Silk
1.9
Handbags
Plastic-sided
16.8
Leather, under $20
10.0
Reptile leather
5.3
Source: From U.S. International Trade Commission, Tariff Schedules of the United States, Washington, DC,
Government Printing Office, 2013, available at http://www.usitc.gov/taffairs.htm.
© 2019 Cengage. All rights reserved.
38
Arguments for Trade
Restrictions (1 of 9)
Free-trade argument
If each nation produces what it does best and
permits trade, in long term, there will be lower
prices and higher levels of output, income, and
consumption
Job protection argument
Job gains less visible than job losses
Trade restrictions result in job gains for few
industries; job losses are spread out
Saved jobs costs more than workers salary
© 2019 Cengage. All rights reserved.
39
Arguments for Trade
Restrictions (2 of 9)
Protection against cheap foreign labor
Low wages abroad makes it hard for U.S. firms to
compete with firms using cheap foreign labor
Fails to recognize links among efficiency, wages,
and production costs
Low wages do not guarantee low costs
Low-wage nations have competitive advantage
only in goods requiring greater labor and few
other factor inputs
© 2019 Cengage. All rights reserved.
40
Arguments for Trade
Restrictions (3 of 9) Table 4.9
Hourly Compensation Costs in U.S. Dollars for Production Workers in
Manufacturing, 2015
Country
Hourly Compensation (dollars per hour)
Norway
49.67
Germany
42.42
United States
37.71
United Kingdom
31.44
Japan
23.60
Taiwan
9.51
Mexico
5.90
Philippines
2.16
Source: From The Conference Board, International Comparisons of Hourly Compensation Costs in
Manufacturing, 2015, April 12, 2016, available at www.conference-board.org.
© 2019 Cengage. All rights reserved.
41
Arguments for Trade
Restrictions (4 of 9) Table 4.10
Productivity, Wages, and Unit Labor Costs, Relative to the United States: Total Manufacturing
(United States = 1.0)
Labor Productivity
Relative to United States
Wages Relative to
United States*
Unit Labor Cost Relative
to United States
Hong Kong (2008)
0.21
0.44
2.09
Mauritius (2007)
0.06
0.12
2.00
South Africa (2008)
0.14
0.27
1.93
European Union (2009)
0.46
0.84
1.83
United Kingdom (2009)
0.50
0.84
1.68
U.S. More Competitive
Singapore (2008)
0.40
0.61
1.53
U.S. Less Competitive
Japan (2008)
0.67
0.72
1.07
Mexico (2009)
0.18
0.17
0.94
South Korea (2006)
0.71
0.61
0.86
Poland (2006)
0.26
0.20
0.77
China (2008)
0.12
0.08
0.67
Country
*At market exchange rate.
Source: The author wishes to thank Professor Steven Golub of Swarthmore College, who provided data for this table. Refer to his CESifo Working Paper at the Center
for Economic Studies, University of Munich, Munich, Germany, 2011. See also Janet Ceglowski and Stephen Golub, Are Chinas Labor Costs Still
Low? This paper was prepared for the CESifo conference on China and the Global Economy Post Crisis, held in Venice, Italy, July 1819, 2011.
© 2019 Cengage. All rights reserved.
42
Arguments for Trade
Restrictions (5 of 9)
Fairness in Trade: Level Playing Field
Domestic producers say import restrictions need
to offset foreign advantages, to create level
playing field
Rationale for restrictions is that foreign governments
play by different rules, giving foreign firms unfair
competitive advantage
Trade benefits domestic economy even if foreign
nations impose trade restrictions
Fair trade argument overlooks potential impact of
trade restrictions on global trade
© 2019 Cengage. All rights reserved.
43
Arguments for Trade
Restrictions (6 of 9)
Maintenance of the Domestic Standard of
Living
Advocates of trade barriers often contend tariffs
are useful in maintaining high level of income and
employment in home nation
However, one nation imposes a tariff that improves its
income and employment at the expense of its trading
partners living standard (beggar-thy-neighbor policy)
May spark retaliatory tariffs, resulting in lower level of
welfare for all nations
© 2019 Cengage. All rights reserved.
44
Arguments for Trade
Restrictions (7 of 9)
Equalization of Production Costs
Scientific tariff - to eliminate unfair competition
from abroad
Problems
Different costs across business
Higher domestic prices
Benefit efficient domestic companies
Domestic consumer subsidizing inefficient production
Scientific tariff approximates prohibitive tariff
Completely contradicts notion of comparative
advantage & eliminates basis/gains for/from trade
© 2019 Cengage. All rights reserved.
45
Arguments for Trade
Restrictions (8 of 9)
Infant-Industry Argument
Trading nations temporarily shield newly developing
industries from foreign competition
If protective tariff imposed, difficult to remove
Special-interest groups - convince policy makers that
further protection is justified
Difficult to determine which industries will realize
comparative advantage in long-run
Not valid for mature, industrialized nations
Alternative=providing domestic industry subsidy
© 2019 Cengage. All rights reserved.
46
Arguments for Trade
Restrictions (9 of 9)
Noneconomic Arguments
National security argument
Protect essential industries
What constitutes an essential industry?
Cultural and sociological considerations
Assumption that national and individuals welfare
enhanced by tariffs
© 2019 Cengage. All rights reserved.
47
Would a Tariff Wall Really
Protect U.S. Jobs?
Trade protectionism political priority in 2016
presidential election
Tariffs on imported steel tend to have a
positive, direct effect on jobs for American
steel workers, but can have less visible,
indirect effects on others
Tariff-related gains for Americans is a complex
issue
© 2019 Cengage. All rights reserved.
48
Political Economy of
Protectionism
Elected officials formulate policies to maximize votes
and remain in office
Bias in the political system favors protectionism
Protection-biased sector
Import competing producers
Labor unions - in protected industry
Suppliers of producers in protected industry
Established firms in aging industry that could lose their
comparative advantage
Free-trade-biased sector
Exporting producers, their workers, and their suppliers
© 2019 Cengage. All rights reserved.
49
A Supply & Demand View of
Protectionism (1 of 3)
Though protectionism provides benefits to domestic
producers, society as whole pays costs
Losses of consumer surplus because of higher prices
Resulting deadweight losses
Lost economies of scale as further opportunities are lost
Loss of incentive for technological development provided by
import competition
The higher the costs of protection, the less likely a
government is to shield an industry from import
competition
© 2019 Cengage. All rights reserved.
50
A Supply & Demand View of
Protectionism (2 of 3)
Supply of protectionism increases, depending
on:
Political importance of import-competing industry
Whether domestic firms and workers face large
costs of adjusting to rising import competition
Public sympathy for a group of domestic
businesses or workers
© 2019 Cengage. All rights reserved.
51
A Supply & Demand View of
Protectionism (3 of 3)
Demand for protection rises with:
Intensification of domestic industrys comparative
disadvantage
Higher levels of import penetration
Concentration of domestic production
Degree of export dependence
© 2019 Cengage. All rights reserved.
52
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