AEM Chapter 4

Can the US levy export tariffs?

"No tax or duty shall be laid on articles exported from any state."

Optimum Tariff

A tariff rate at which the positive difference between the gain of improving terms of trade and the loss of declining import volume is maximized.An optimum tariff is only beneficial to the importing nation. The more inelastic the foreign supply, the more the large country can get its trading partners to accept lower prices for the large country's imports.

Scientific Tariff

A tariff that eliminates foreign cost advantages over domestic firms.Owing to such factors as lower wage costs, tax concessions, or government subsidies, foreign sellers may enjoy cost advantages over domestic firms. To offset any such advantage, tariffs equivalent to the cost differential should be imposed.

Terms of trade effect

The tariff revenue extracted from foreign producers in the form of a lower supply price. Note that the terms-of-trade effect represents a redistribution of income from the foreign nation to the tariff-levying nation because of the new terms of trade. The tariff's revenue effect thus includes the domestic revenue effect and the terms-of-trade effect.

Season Tariffs

When these products are out of season in the United States, the tariff is low. Higher tariffs are imposed when U.S. production in these goods increases during harvest season.

Tariff Evasion

occurs when individuals or firms evade tariffs by illegal means such as smuggling imported goods into a country.

offshore assembly provision (OAP)

provides favorable treatment to products assembled abroad from U.S. made components. Under OAP, when U.S. made components are sent abroad and assembled there to become a finished good, the cost of the U.S. components is not included in the dutiable value of the imported assembled good into which it has been incorporated. American import duties thus apply only to the value added in the foreign assembly process, provided that the U.S. manufactured components are used in assembly operations. One of the effects of OAP is to reduce the effective rate of protection of foreign assembly activity and shift demand from domestic to foreign assembly

Consumer Surplus

refers to the difference between the amount that buyers would be willing and able to pay for a good and the actual amount they do pay.

Tariff Avoidance

the legal utilization of the tariff system to one's own advantage in order to reduce the amount of tariff that is payable by means that are within the law.

Types of Valuation: cost-insurance-freight (CIF) valuation

But European countries have traditionally used a cost-insurance-freight (CIF) valuation, whereby ad valorem tariffs are levied as a percentage of the imported commodity's total value as it arrives at its final destination. The CIF price thus includes transportation costs, such as insurance and freight.

How do you determine the overall welfare change of a nation?

If the terms of trade effect is larger than the deadweight loss=INCREASED If the terms of trade effect is smaller than the deadweight loss= DECREASED If they are the same=REMAINED CONSTANT

Small country importer versus small country exporter

Importer: flat ES curve Exporter: flat ED curve

Small Nation Tariffs

Levying an import tariff reduces a small nation's welfare.

Arguments for trade Restrictions

Modern trade theory and the idea of free trade is good in theory but it is not applicable to the everyday world Protectionism (for example for national security) more than offsets the negatives of tariffs and other trade barriers etc

How does a tariff burden an exporter? 2

RAISE THE COST OF LIVING/ UPSURGE ON WAGES Workers have the incentive to demand correspondingly higher wages, resulting in higher production costs.

How does a tariff burden an exporter? 1

RAISE THE COST OF PRODUCTION/ INPUTS Protecting domestic steel producers from import competition can thus lessen the export competitiveness of domestic steel using producers.

Domestic revenue Effect

The amount of tariff revenue shifted from domestic consumers to the tariff-levying government.

So why do large nations imposes tariffs on imports?

There is a gain because of improved terms of trade and a loss due to reduced import volume.

Income distribution effects of tariffs

They conclude that tariffs tend to be inequitable because they impose the most severe costs on low-income families. Tariffs, for example, are often applied to products at the lower end of the price and quality range. Basic products such as shoes and clothing are subject to tariffs, and these items constitute a large share of the budgets of low-income families. They are much higher on cheap goods than luxuries.

Outsourcing

When certain aspects of a product's manufacture are performed in more than one country.

tariff escalation

although raw materials are often imported at zero or low tariff rates, the nominal and effective protection increases at each stage of production. The tariff structures of the industrialized nations may indeed discourage the growth of processing, hampering diversification into higher value-added exports for the less developed nations. The industrialized nations' low tariffs on primary commodities encourage the developing nations to expand operations in these sectors, while the high protective rates levied on manufactured goods pose a significant entry barrier for any developing nation wishing to compete in this area.

Foreign Trade Zone

an area within the United States where business can operate without the responsibility of paying customs duties on imported products or materials for as long as they remain within this area and do not enter the U.S. marketplace. Customs duties are due only when goods are transferred from the FTZ for U.S. consumption. The manufacturing of goods is also allowed in FTZs. Therefore, importers who use FTZs can conduct a broader range of business activities than can occur in bonded warehouses that permit only the storage of imported goods and limited repackaging and processing activities. The FTZ program treats a product manufactured in a FTZ, for purposes of tariff assessment, as if it were produced abroad.

Free-trade biased sector

generally comprises exporting companies, their workers, and their suppliers. It also consists of consumers, including wholesalers and retail merchants of imported goods.

Protection-biased sector

generally consists of import-competing producers, labor unions representing workers in that industry, and suppliers to the producers in the industry. Seekers of protectionism are often established firms in an aging industry that have lost their comparative advantage. High costs may be due to lack of modern technology, inefficient management procedures, outmoded work rules, or high payments to domestic workers.

Why are there export tariffs?

in order to raise revenue or promote scarcity in global markets and hence increase the world price.

Types of Tariffs: Compound Tariff

A compound tariff is a combination of specific and ad valorem tariffs. A U.S. importer of a television might be required to pay a duty of $20 plus 5 percent of the value of the television. Compound duties are often applied to manufactured products embodying raw materials that are subject to tariffs. In this case, the specific portion of the duty neutralizes the cost disadvantage of domestic manufactures that results from tariff protection granted to domestic suppliers of raw materials, and the ad valorem portion of the duty grants protection to the finished-goods industry.

Protective tariff

A protective tariff is designed to reduce the amount of imports entering a country, thus insulating import-competing producers from foreign competition. This tariff allows an increase in the output of import-competing producers that would not have been possible without protection.

Revenue tariff

A revenue tariff is imposed for the purpose of generating tax revenues and may be placed on either exports or imports. Developed countries don't use revenue tariffs to generate tariffs as much anymore

Possible solution to foreign competition of low foreign wages

A solution would be to impose a tariff or tax on goods brought into the United States equal to the wage differential between foreign and U.S. workers in the same industry. That way, competition would be confined to who makes the best product, not who works for the least amount of money.

Types of Tariffs: Specific Tariff

A specific tariff is expressed in terms of a fixed amount of money per physical unit of the imported product. A U.S. importer of a German computer may be required to pay a duty to the U.S. government of $100 per computer, regardless of the computer's price. Therefore, if 100 computers are imported, the tariff revenue of the government equals $10,000 inequality. Disadvantage: does not provide much protection to domestic producers Advantage: provides protection to producers during recessions because prices are low and the tariff scares off foreign competition

Bonded Warehouse

A storage facility operated under the lock and key of (in the case of the United States) the U.S. Customs Service. Dutiable imports can be brought into the United States and temporarily left in a bonded warehouse, duty free. When the time arrives to withdraw the imported goods from the warehouse, duties must be paid on the value of the goods at the time of withdrawal rather than at the time of entry into the bonded warehouse. However, imported components cannot be assembled into final products in a bonded warehouse, nor can the manufacturing of products take place. A main advantage of a bonded warehouse entry is that no duties are collected until the goods are withdrawn for domestic consumption.

Tariff

A tariff is simply a tax levied on a product when it crosses national boundaries. The most widespread tariff is the import tariff, which is a tax levied on an imported product. This tax is collected before the shipment can be unloaded at a domestic port; the collected money is called a customs duty. A less common tariff is an export tariff, which is a tax imposed on an exported product. Export tariffs have often been used by developing nations.

Large Nation Tariffs

A tariff may increase national welfare when it is imposed by an importing nation that is large enough so that changes in the quantity of its imports, by means of tariff policy, influence the world price of the product.

Protective Effect of the Tariff

A tariff's loss to the domestic economy resulting from wasted resources when less efficient domestic production is substituted for more efficient foreign production. This increase means that resources are used less efficiently than they would have been with free trade, in which case autos would have been purchased from low-cost foreign producers.

Consumption Effect of the Tariff

A trade restriction's loss of welfare that occurs because of increased prices and lower consumption. 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).

US Examples of Protectionism: TIRES

According to the Obama administration, the tariffs would significantly reduce tire imports from China and boost U.S. industry sales and prices, resulting in increased profitability. This profitability would result in the preservation of jobs and the creation of new ones, as well as encourage investment. The imposition of the tire tariffs provided mixed evidence of their effects. The biggest beneficiaries of the tariffs were probably tire producers in Indonesia, South Korea, and Thailand, which replaced supply from China during the 3-year period of the tariffs.

Types of Tariffs: Ad Valorem

An ad valorem (of value) tariff, much like a sales tax, is expressed as a fixed percentage of the value of the imported product. Suppose that an ad valorem duty of 2.5 percent is levied on imported automobiles. If $100,000 worth of autos are imported, the government collects $2,500 in tariff revenue . This $2,500 is collected whether 5 $20,000 Toyotas are imported or 10 $10,000 Nissans are imported. Most of the tariffs levied by the U.S. government are ad valorem tariffs. Advantage: tariff signals the quality of the import. It has constant protection to domestic producers at any price level.

Tariffs on different nations and their effects

Asian countries like Cambodia and Bangladesh are hit hardest by U.S. tariffs; their cheap consumer goods often face tariff rates of 15 percent or more, some 10 times the world average.

How does a tariff burden an exporter? 3

BACKFIRE: EXPORTERS HAVE NO MONEY FOR OUR EXPORTS NOW import tariffs have international repercussions that lead to reductions in domestic exports. Tariffs cause the quantity of imports to decrease that decreases other nations' export revenues and ability to import. The decline in foreign export revenues results in a smaller demand for a nation's exports and leads to falling output and employment in its export industries.

Why does the U.S. government impose high tariffs on footwear when there is virtually no American industry to protect?

Footwear tariffs are regressive and thus burden people at the lower end of the income ladder more than the wealthy. proponents of the Affordable Footwear Act contend that U.S. footwear companies generally produce specialty and high-value shoes, not the types of inexpensive shoes that are subject to the tariff cut provisions of the Affordable Footwear Act

Types of Valuation: Free- On- Board Valuation

For example, the United States has traditionally used free-on-board (FOB) valuation, whereby the tariff is applied to a product's value as it leaves the exporting country.

Effective Tariff Rate

The effective tariff rate takes into account not only the nominal tariff rate on a finished product, but also any tariff rate applied to imported inputs that are used in producing the finished product. A nominal tariff on a desktop protects the production of Dell, while a tariff on imported components taxes Dell by increasing its costs.

Large nation and "terms of trade"

The burden of the tariff is shared by both American consumers and japanese firms. The welfare of the United States rises when it can shift some of the tariff to Japanese firms via export price reductions. The terms of trade improve for the United States at the expense of Japan. This result differs from the small nation case in which the supply schedule is horizontal and the tariff's burden falls entirely on domestic consumers. The levying of the tariff raises the domestic price of the import by only part of the duty as foreign producers lower their prices in an attempt to maintain sales in the tariff levying nation. The importing nation finds that its terms of trade have improved if the price it pays for auto imports decreases, while the price it charges for its exports remains the same.

Customs valuation

The main problem with ad valorem has been trying to determine the value of an imported product, a process referred to as customs valuation. Import prices are estimated by customs appraisers who may disagree on product values. Moreover, import prices tend to fluctuate over time, making the valuation process rather difficult.

Nominal Tariff Rate

The nominal tariff rate is the rate that is published in the country's tariff schedule. This rate applies to the value of a finished product that is imported into a country.

beggar-thy-neighbor policy

The practice of imposing protectionist policies to achieve gains from trade at the expense of other nations. The LOSERS (foreign exporters) of optimum tariffs Example: Retaliation by the foreign exporters Smoot-Hawley tariff

Redistributive Effect

The redistributive effect is the transfer of the consumer surplus in monetary terms, to the domestic producers of the import-competing product. The redistributive effect is a transfer of income from consumers to producers. Like the revenue effect, it does not result in an overall loss of welfare for the economy.

Revenue Effect of a tariff

The tariff's revenue effect represents the government's collections of duty. Found by multiplying the number of imports (20 autos) times the tariff ($1,000), government revenue equals area c, or $20,000. This revenue represents the portion of the loss in consumer surplus in monetary terms that is transferred to the government.

How does a Tariff burden an exporter General idea

The welfare losses because of restrictions in output and employment in the economy's export industry may offset the welfare gains enjoyed by import-competing producers. We are moving towards greater self sufficiency by imposing tariffs which lowers our overall trade volume

infant-industry argument

This argument does not deny the validity of the case for free trade. However, it contends that for free trade to be meaningful, trading nations should temporarily shield their newly developing industries from foreign competition. Otherwise, mature foreign businesses that are at the time more efficient can drive the young domestic businesses out of the market. Only after the young companies have had time to become efficient producers should the tariff barriers be lifted and free trade take place.

Producer Surplus

what producers are demanding to receive versus what they actually receive