ASSIGNMENT 1- TARIFF

A tariff is a duty or tax imposed by the government of a country upon the traded
commodity as it crosses the national boundaries. Tariff can be levied both upon
exports and imports. Tariff are synonymous with import duties or custom duties.
The following are the types of tariffs-
1. Ad Valorem Duty –
The phrase "ad valorem" is Latin for "according to value" and is the most common
type of tariff. It is imposed as the value of the imported commodity. It is fixed
percentage of c.i.f. (cost of production, insurance and freight) value of imported
commodity. An example of an ad valorem tariff would be a 15% tariff levied by Japan
on U.S. automobiles. The 15% is a price increase on the value of the automobile, so
a $10,000 vehicle now costs $11,500 to Japanese consumers. Higher the value of
commodity higher is the ad valorem tariff.
2. Specific Import Duty –
A fixed fee levied on one unit of an imported good is referred to as a specific tariff.
This tariff can vary according to the type of good imported. For example, a country
could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each
computer imported.
3. Compound Duty –
The compound tariff is a combination of specific and ad valorem tariff. The structure
of compound tariff includes specific duty on each unit of the commodity plus a
percentage of ad valorem duty.
4. Sliding Scale Duty –
Sliding Scale duty are imposed on either ad valorem or specific basis. The import
duties which vary with the prices of the commodities are termed as sliding scale
duties. In practice, these are generally on a specific basis.
Tariff can also be classified as Protective tariff and Revenue tariff.
The tariff, which is imposed primarily for generating more revenues for the
government is called as the revenue tariff. The imposition of tariff, even for the
purpose of securing revenues, does have protective effect when it leads to switch of
demand by the domestic consumers from the imported to home- produced goods.
The tariff may be imposed by the government to protect the home industries from the
cut-throat competition from the foreign produced goods. The higher the tariff, greater
may be the protective effect of tariff. A high rate of protective tariff can make the
domestic producers more lethargic and inefficient and unable to face foreign
competition even in the long run.
Effects of Tariff –
Effects of tariff can be analyzed from two points-
1. Point of view of specific commodity or market i.e. Partial Equilibrium Approach
2. Point of view of the economy as whole i.e. General Equilibrium Approach

Partial Equilibrium Effects of Tariff –

In the diagram, DX and SX represent nation 2’s demand and supply respectively of
the commodity X. At free trade price of PX = $1 nation 2 consumes 70 X units (AB)
of which 10 X (AC) is produced domestically and 60 X (CB) is imported. With 100%
import tariff on commodity X, PX rises to $2 for individuals in nation 2. At this price
nation 2 consumes 50 X units (GH), of which 20 X (GJ) is produced domestically and
30 X (JH) is imported. Thus consumption effect of tariff is (-) 20 X (BN) and
production effect of tariff is 10 X (CM); the trade effect is (-) 30 (BN+CM) and
revenue effect is $30. Elastic DX and SX are in nation 2 i.e. the greater the trade
effect of tariff the smaller the revenue effect of tariff.
1. Price Effect-
If tariff is increased on an imported commodity, then the effect will be-
i) if the commodity’s demand is inelastic in the importing country, then the price of
the commodity imported will rise
ii) if the commodity’s demand is highly elastic in the importing country, then the price
of the commodity will not rise and the exporting country will pay tariffs
iii) if the position is in between, the price of the commodity will not rise by the full
amount of tax, but only partly in the importing country. Thus the tariff burden gets
divided between the importing and exporting country, the proportion depending on
the degree of elasticity of demand of the imported commodity in the country.
2. Protection Effect –
If the idea behind the imposition of tariff is to protect and promote the competing
domestic industry, logically the revenue from such tariff should be insignificant, if the
competing domestic industry is to be fully protected by foreign goods. The
substitution of domestic good for foreign goods is called import substitution effect of
tariff.
3. Consumption Effect –
The idea of this is to impose tariff so as to reduce consumption of goods here to
being imported. Such tariff will reduce net satisfaction of domestic consumers.
4. Revenue Effect –
Here the idea is to increase revenue of the state. In this case, the rate of tariff is
likely to be much lower than cost differentials i.e. relative cost advantage in the
production of the commodity. The same amount of the commodity will be imported
and a relatively low (5% to 10%) of import duty will be imposed to raise revenue of
the state.
5. Terms of Trade Effect –
If the supply is perfectly inelastic in exporting country and demand is fairly elastic in
importing country, the entire burden of tariff will be borne by the exporting country
while the importing country will receive substantial amount of revenue. This means
that after imposing the tariff the terms of trade will move in favor of country imposing
the tariff.
6. Competitive Effect –
As in case of infant industry argument, here tariff is imposed to increase competitive
power of the competing domestic goods. There is a possibility that under such
protective tax the infant industry might not grow or due to there is emergence of
domestic monopolies and inefficient industries. Prof. Kindlberger said that
competitive effect of tariff is really anti-competitive; competition is stimulated by
removal of tariff.
7. Income Effect –
The imposition of tariff reduces the demand for foreign products. The amount of
money not spent on imported goods may either be spent on the home-produced
goods or saved. If there is the existence of surplus productive capacity in the home
country, switch of expenditure from foreign to home-produced goods will lead to a
rise in production, employment and income.
This works in case of under full employment, but in case of full employment in
country imposing tariff, the inflation will rise and real income will be affected.
There is a limit to which the tariff can be increased, beyond which the exporting
country will take counter measures and harm the exporting industries of the country
first imposing tariffs.
8. Balance of Payment Effect –
When the country find that it id facing a Balance of Payment deficit due to high
imports, it may borrow from abroad or draw foreign currencies from the reserves to
meet the deficit. But this cannot go forever as the reserves will dry soon and the
debts will rise,

In the regard, some doubts are raised that tariff may fail to improve the balance of
payments deficit. Firstly, if the demand for imports in the tariff- imposing country is
inelastic, tariff may not reduce the volume of imports despite the rise in the prices of
imported goods consequent upon the imposition of tariff. Secondly, if the balance of
payments disequilibrium is caused by the export surplus, the imposition of tariff will
further aggravate rather than adjust the balance of payments disequilibrium. Thirdly,
tariff can, at the maximum, bring about some adjustment in temporary disequilibrium
of international payments. There is no possibility of adjusting the fundamental
disequilibrium in the balance of payments through tariff restrictions.

General Equilibrium Effect of Tariff –

In a large country, free trade offers curves 1 and 2, E is equilibrium point and P x/Py =
1 in both nations. A 100% ad valorem import tariff on commodity X by nation 2
rotates its offer curve to 2´, defining the new equilibrium point E´. At point E ´ volume
of trade is less than under free trade and P x/Py = 0.8. This means that Nation 2’s
terms of trade improved to Px/Py = 1.25. The change in Nations 2’2 welfare depends
on the net effect from the higher terms of trade but lower volume of trade. However,
since the government collects half of the imports of commodity X as tariff, P x/Py for
individuals in Nation 2 rises from P x/Py = 1 under free trade to P x/Py = PD = 1.6 with
the tariff.
ASSIGNMENT 2- IMPORT QUOTA

The import quota means physical limitation of the quantities of different products to
be imported from foreign countries within a specified period of time, usually one year.
The import quota may be fixed either in terms of quantity or the value of the product..
It is often practiced as an alternative to tariffs. For instance, the government may
specify that 60,000 color T.V. sets may be imported from Japan. Alternatively, it may
specify that T.V. sets of the value of Rs. 50 crores can be imported from that country
during a given year.
Methods of Fixing Import quota –

 Issue of import license to the highest bidder in the open market or issue of
import licence by calling for the tenders form prospective importers, the
highest tenderer getting the licence;
 Issue of import license on first-come first-serve basis;
 Issue of import licenses of specific categories of importers such as
established importers, star trading houses, actual users etc.;
 Issue of import licenses to some government agency such as the State
Trading Corporation.

Objectives of Import Quota –

1. To provide protection and help development of domestic industries by restricting
imports and thus restricting foreign competition;
2. To bring about correction in the Balance of Payment position of the country i.e. to
reduce deficit in BOP;
3. To make rational use of the foreign currency earned by exporting goods and
services;
4. To discourage conspicuous consumption by the wealthy sections through placing
quota restrictions on the import of luxury goods;
5. To retaliate against the restrictive trade policies adopted by some of the foreign
countries.
Type of Imports Quotas –
1. Bilateral Quota –
In case of the bilateral quota system, the import quota is fixed after negotiations
between the importing and exporting countries. Haberler has called the bilateral
quotas as agreed quotas. For example – India and Japan make an agreement and
India allows import of watches worth Rs. 25 crores per year from Japan.
2. Unilateral Quota –
Under this system, import quota of a particular commodity from a particular country
is fixed by law or decree by the importing country without any negotiation or
agreement with the other country.
The unilateral quota can be broadly of two types – (a) global quota and (b) allocated
quota. In the case of global quota, the entire quantity to be imported may be
obtained from any one or more countries during the specified period. Under the
allocated quota system, the total quantity of import quota is allocated or distributed
among the different exporting countries on the basis of certain criteria.
3. Tariff Quota Fixation System –
Under this system a pre-determined quantity of a commodity is permitted to be
imported either free i.e. without paying any duty, or on payment of import duty that is
relatively low. But import of the commodity beyond such fixed quota is charged
relatively high import duty.
4. Mixed Quota System –
Under this system, which is also known as indirect quota, the domestic producers in
the quota-fixing country are required to make use of domestic raw materials along
with the imported raw material in a specified proportion.
Implementing Quota System –
After import quotas of concerned commodities are fixed in one of the above methods
the concerned government department/ authority issues import licenses to import
specified quantities of fixed quotas of commodities to be implemented.

Partial Equilibrium effect of Import Quotas –

Dx and Sx are the demand and supply curve of a nation for commodity X. Starting
from the free trade Px = $1. An import quota of 30 X (JH) would result in P x = $2 and
consumption of 50 X (GH), of which 20 X (GJ) is produced domestically. If the
government auctioned off import licenses to the highest bidder in a competitive
market, the revenue effect would also be $30 (JHNM), as with 100% import tariff.
With a shift in Dx to D´x and import quota of 30 X (J´H´), consumption would rise from
50 X to
55 X (G´H´), of which 25 X (G´J´) are produced domestically. Domestic production at
20 X (GJ), but domestic consumption would rise to 65 X (GK) and imports to 45 X
(JK).
ASSIGNMENT 3- NON- TARIFF BARRIERS (NTB’s)

Non-tariff barriers are trade barriers that restrict the import or export of goods
through means other than tariffs. These are administrative measures that are
imposed by a domestic government to discriminate against foreign goods in favor of
domestic goods.
The World Trade Organization (WTO) identifies various non-tariff barriers to trade,
including import licensing, pre-shipment inspections, rules of origin, custom delayers,
and other mechanisms that prevent or restrict trade.
There are various barriers to trade, these can be classified as –
1. Quantitative Trade Restrictions, this includes- Import quotas, tariff quotas,
voluntary export restraints (VER’s), ordinary marketing arrangements or agreements
(OMA’s), multi-fiber arrangement (MFA), etc.
2. Fiscal measures relate to export or production subsidies, export tax, government
procurement, anti-dumping duties, countervailing duties, etc.
3. Administrative Standards and regulations refer to environment (pollution) control,
custom valuation, import licensing procedures, state trading and government
monopolies etc.
4. Others include bilateral trade agreements, dumping, international commodity
agreements, international cartels etc.
Types of NBT’s –
The following are the main types of NBT’s –
1. Voluntary Export Restraints (VER’s) –
It is and agreement by an exporter country’s exporters or government with an
importing country to limit their exports to it. It is entered into by the importing country
when its domestic industry is suffering from large imports. The limits to imports may
be set in terms of quantity, value or market share. These are accepted by exporters
usually but sometimes the exporting country expects to make profits by exporting
less at higher price it may use this.
VER’s have been adopted by countries because the use of quotas and tariffs has
been forbidden by the GATT, but VER’s do not come under it.

The effects of VER upon the importing country may be explained through the
diagram below-
In Fig. 16.5., D is the domestic demand curve and S1 is the domestic supply curve of
good. Originally the world supply curve of the good at price OP0 is S0. The quantity
imported is QQ1. If the exporting and importing countries enter the voluntary export
agreement about the import of Q2Q3 quantity by the home country at the price OP1,
the world supply curve shifts to S0’. The domestic supply curve shifts to S1‘.
The net loss to the importing home country is measured by the area (A + B + C). In
case of tariffs, the area B represents the revenue gain to the government of the
importing country. In case of equivalent VER, the equivalent amount is taken away
by the foreign exporters in the form of rents. It is in fact this consideration of rent that
makes the foreign suppliers to enter into the voluntary export arrangement.

2. Export Subsidy –
Export subsidy is a government grant given to an export firm (producers) to reduce
the price per unit of the goods exported from abroad. It enables the firm to sell a
larger quantity of its goods at a lower price in the export market than in the home
market. Export subsidies may be direct or indirect. Direct export subsidies are
prohibited under GATT agreement and hence governments resorts to indirect
exports subsidies in various forms such as subsidized credit, refunds on their inputs,
priority in allocation of scarce raw materials or foreign currency, assistance in
financing such promotional activities as trade fairs, market research, advertisements,
tax concessions etc.

The effect of export subsidy or the cost of protection due to subsidies can be
examined through Fig. 16.7. In this Fig., DX and SX are the demand and supply
curve of the exportable commodity X of the home country A. The free trade world
price of the commodity is OP.
At this price, the domestic supply is OQ1 and demand is OQ so that exportable
surplus is QQ1. If PP1 per unit subsidy is extended, the price for domestic
consumers and producers is OP1. At this price, the quantities demanded and
supplied are respectively OQ2 and OQ3. The exportable surplus expands from
QQ1 to Q2O3. The increase in domestic price results in a loss in consumer’s surplus
by PEAP1. The gain in producer’s surplus, on the other hand, is PFBP1. The cost of
subsidy is PP1 × Q2Q3 = AC × AB = ACGB
Net Loss or the Cost of Protection
= Loss in Consumer’s Surplus + Cost of Subsidy – Producer’s Surplus
= PEAP1 + ACGB – PFBP1
= ΔACE + ΔBGF
Thus the redistributive effects related to export subsidies can cause a net loss in
welfare in the exporting country apart from the fact that the products of other
countries will be at some disadvantage in foreign markets. As other countries also
resort to countervailing duties or export subsidies, there can be a serious restrictive
effect upon the international trade.

3. Countervailing Duty –
Countervailing duty is an import duty or tariffs imposed by an importing country to
raise the price of a subsidized export product to offset its lower price. In cases
foreign producers attempt to subsidize the goods being exported by them so that it
causes domestic production to suffer because of a shift in domestic demand towards
cheaper imported goods, the government makes mandatory the payment of a
countervailing duty on the import of such goods to the domestic economy. This
raises the price of these goods leading to domestic goods again being equally
competitive and attractive. Thus, domestic businesses are cushioned. These duties
can be imposed under the specifications given by the WTO (World Trade
Organization) after the investigation finds that exporters are engaged in dumping.
These are also known as anti-dumping duties.
4. Government procedure –
Governments discriminate between the domestic and foreign suppliers of goods and
services required by the government. This may be in various ways like a legislation
to buy domestic goods even if they are available at cheap from abroad. In some
cases the tenders for government purchases are called only from domestic
suppliers. For instance Japanese government agencies do not consider foreign bids.
Government also exercises discretionary powers not to accept or reject bids from
foreign suppliers. Sometimes specifications of tenders are written in such a manner
as to exclude foreign suppliers. The aim is to support domestic industry. Its impact is
like tariff but without thee revenue. In fact the cost of procurement of goods and
services by the government increases.
5. Import Licensing Procedures –
Many countries adopt complicated and expensive import licensing procedures to
restrict imports. Import licensing are often auctioned to the highest bidders. In other
cases importer are required to deposit large sum of money with the government for
getting import license. There are also administrative hurdles which importers have to
overcome. In filling lengthy forms, obtaining permits and getting clearance for goods
through customs. Such procedures restrict imports like import tariffs.
6. Local Content Regulations –
In many developing countries imports of manufactured products like cars, T.V.s,
computers etc. are restricted if they do not meet local content regulations. Foreign
manufacturers of cars in India are required to have sufficient local content in the form
of spare parts manufactured within India. This is done to protect domestic producers
of parts from foreign competition. Such regulations discourage foreign investments
rather than trade.
7. Technical Barriers –
These are of various types which restrict imports. They include health and safety
regulations, sanitary regulations and industrial standard, labelling and packaging
regulations and so on. Such regulations impose additional costs on foreign suppliers
of goods in order to restrict their imports. For instance foreign car makers are
required to comply with domestic safety and emission controls of US and European
countries while importing cars to them. The same can be set for health standards
which require importers of eatables to adhere to certain quality, packaging and other
standards.
NTB’s vs Tariffs –
All NTB’s described above tend to reduce imports and are similar in their effects of
tariffs. Still the following advantages of tariffs over NTB’s–
1. Tariff only disturbs the market mechanism whereas NTB’s displace it.
2. Tariffs are transparent because they are visible to every person and organization
in terms of percentage or ad valorem duties. But NTB’s are hidden from public which
does not know that they have been levied.
3. Tariffs are simple and easy to negotiate and implement, than some of the NTB’s.