ENC 500 Saudi Electronic University Global Economic Discussion

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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 country’s 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
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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 product’s value as it leaves exporting country
• Europe traditionally uses cost-insurance-freight valuation
(CIF)?tariffs levied as percentage of imported commodity’s 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 country’s
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
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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
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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 one’s 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
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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
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25
Tariff Welfare Effects:
Small-Nation Model (3 of 4)
• A small nation tariff effects on nation’s
welfare:
•
•
•
•
•
Consumer surplus falls
Additional tax revenues
Benefits domestic producers
Wastes resources
Revenue effect (Area “c”)
• Government’s 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 nation’s
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 tariff’s 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 Japan’s 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 Trump’s “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) • Obama’s 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 2004–2008, 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) • Obama’s 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 20–30% • 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) Men’s 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 worker’s 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 China’s 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 18–19, 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 partner’s 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 individual’s 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 industry’s comparative disadvantage • Higher levels of import penetration • Concentration of domestic production • Degree of export dependence © 2019 Cengage. All rights reserved. 52 Purchase answer to see full attachment Tags: economies Global Economic Tariff War developing country International Economics User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.