Tariffs

A tariff is a tax on imports and is used to restrict imports and raise revenue for the government.
We assume in the diagram below that producers from other countries can supply the good at a
constant price of Wp - their supply curve is perfectly elastic.

The domestic demand and domestic supply curves are shown. If the market price is Wp, output
Qs is produced by domestic firms and Qd will be the demand from home consumers. Because
Qd>Qs, imports will come into the economy to satisfy the excess demand.

A tariff is placed on the value of imports. This raises the price of imports and as a result,
domestic demand contracts and domestic supply expands. Home producers can supply more at
the new higher price. The tariff gives domestic firms a competitive boost. The volume of imports
has reduced.

The effect of the tariff depends on the price elasticity of demand and the price elasticity of
supply. A tariff will have a greater effect the more elastic the demand and supply. If the demand
is inelastic then the imposition of a tariff will have little effect on the level of imports. The
introduction of tariffs by one country can lead to retaliation responses from other countries. This
retaliation can lead to damaging trade-wars.

Import Quotas
An import quota directly reduces the quantity of a product that is imported and indirectly reduces
the amount of money that the export producers receive. The main beneficiaries of quotas are the
domestic producers who face less competition.

Voluntary Export Restraint

A voluntary export restraint is similar to an import quota. With a VER, the exporting country
voluntarily restricts the number of goods that it ships to its trading partner. Foreign exporters
must purchase licences from its government and then exports its allotted amount. The price they
receive for their goods, minus the cost of the export licence, is their profits

Export Subsidy
An export subsidy is a payment to a domestic producer who exports a good abroad. If receiving
an export subsidy, a firm can remain competitive abroad by exporting up to the foreign price
(because the subsidy will cover some of the difference) yet receive the higher price domestically.
The effects of a subsidy are the opposite of those of a tariff. In the spring of 2001, a trade dispute
arose between Canada and Brazil about trade-distorting export subsidies by the Canadian
Government to its firms when trying to sell aircraft to the United States.