Ch 8: Trade Restrictions - Tariffs

Large Country: better off or worse off from imposing tariffs?

- Ambiguous if large country is better off or worse off. Tariff simultaneously makes them worse off and better off. Depends on: If negative wealth effect < ToT = Better Off If negative wealth effect > ToT = Worse Off

Stolpher-Samuelson

- An increase in the relative price of a good, raises the real wage of the factor used intensively in its production - When tariff protection raises the price of imported goods and raises the price of the domestic good, the facto of production in the com

Effects of Tariffs: Implications from this graph

- Demand has gone down to 40 (from 50 with free trade) - Production effect: has gone up (domestic producers producing more) - Price effect: has gone up (the price of the bottles has increased from the previous free trade price) - Consumption Effect has gone down: (consumers only get to enjoy 40 thousand bottles instead of 50 thousand) - Jobs effect has gone up: (domestic producers producing more, so they need more people to work for them) - Trade/import effect has gone down: (only importing 20 thousand bottle, not from the free trade amount of 40 thousand) - Government revenue has gone up: importing 20,000 bottles * $10 tariff = $200,000 - Redistributes income: 1) Domestic producers and government gain 2) Consumers and foreign producers lose

Effects of tariffs: Characteristics of relatively small country that imposes a tariff which competes with domestic good of a small industry.

- Impose tariff that competes with domestic goods - Caribbean island : relatively small country, not a big impact on the world, so they don't have to worry about effecting international prices. - The good is: rum which is a small industry on the island, and therefore not a big impact on GDP.

What happens when a small country trades with a large country?

- Large country puts an optimal tariff on imports - The small country suffers - The small country won't change the world market much by not trading with the large country - The small nation is at a disadvantage when trading with large partners - They're too small to effect world prices - Some countries have much more power over trade: 1) Large countries have the most power over trade 2) Small countries are insignificant

Optimal Tariff:

- Maximizes positive ToT effect with lowest negative wealth effect. - Other countries do nothing in this example, this is not true in the real world, countries DO retaliate, this can turn into a tariff war.

Look at the volume of taxes over the last 30-40 years:

- Taxes have declined - During The Great Depression in the 1930s: tax on imports was up to 65-70%. - US imports today are all mostly taxed less than 10%, comparatively small amount.

Why did countries start imposing tariffs?

- They did this to increase exports and lessen imports, all money raised goes to the government, (mercantilism). - Today, poorer countries find that tariffs fund their government revenues. - US gets 20 billion a year from tariffs, 20 billion out of 4 trillion is not a big source of revenue.

Mostly everything we have looked at has been pro(free)-trade:

- Yet almost all countries have trade barriers, leaders state that they are free trade and continue to put up barriers - We see that that around the world, majority of nation's welfare benefit from barriers to trade. - Most pro-trade theorists would argue that free trade benefits the world, all nations restrict trade because that benefits people in their country.

Genrally, Tariffs can be imposed in three ways:

1) Ad Valorem: percent of the value of the traded good - 10% tax on imported cars - $20,000 car comes in, tax = $2,000 - $40,000 car comes in, tax = $4,000 - Like sales tax 2) Specific: specified amount - $100 tax on imported cars - $20,000 car comes in, tax = $100 - $40,000 car comes in, tax = $100 3) Compound: combo of Ad Valorem & Specific - 5% ad valorem and specific duty of $10 on imported bikes - $100 bike, collection = ad valorem: 100 x .05 = 5 ; Specific duty: $10, so... $10 + $5 = $15 - $200 bike, collection = 200 x .05 = $10 + 10 = $20

Administrative Differences (Specific rates & Ad Valorem):

1) Specific Rates: much easier to impose - When an import comes in, the customs men/women know that for any car they are supposed to collect $1,000 - Very simple, no math to calculate - The burden of this tax falls more heavily on cheaper goods - If a $10,000 car comes in, $1,000 is 1/10 of the price of the whole thing - If a $40,000 car comes in, $1,000 is 1/40 of the price of that car 2) Ad Valorem: much harder to calculate - The customs men/women have to figure out the value of the car and then calculate the percent that they need. - The burden is evenly distributed with Ad Valorem tax

Effects of tariffs: What happens to supply & demand graph?

Effects on the graph: (graph 1 example in notes) 1) The supply and demand lines show domestic demand and supply for the country 2) The pre-trade price is $30 and the pre-trade quantity is 30 thousand bottles. 3) The country opens up to free-trade, the world price is $10 (the red line) 4) At $10 the domestic producers will only want to produce 10 thousand bottles, the other 40 thousand bottles will be imported. 5) Domestic producers are losing a lot of their money by opening up to free trade. 6) The country then imposes a 100% tariff, this moves the price to $20 (the green line). 7) At this price domestic producers will produce 20 thousand bottles, and the country will import 20 thousand bottles as well.

Import tariffs & Export tariffs

Import Tariff: A duty on the imported good (more important than export tariffs, most of our discussion). Export Tariff: A duty on the exported goods. - Export tariffs are prohibited by the US constitution - But Export tariffs are often applied by developing countries on their traditional exports (e.g. Brazil and Coffee) to get better prices, and raise revenues b/c of their ease of collection. - Industrial countries invariably impose tariffs (or other barriers) to protect some (usually labor-intensive) industry, while using mostly income taxes to raise revenues.

Most common barrier to trade:

Tariff: A tax or duty levied on the traded good (usually on imported goods) as it crosses a national boundary. - Source of revenue - Historically (and currently), tariffs are placed in efforts to protect a domestic good. - Sometimes there is a tax on exported goods (e.g. special (very mind altering) wine exported from Germany)