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ECON113: ECONOMICS OF GLOBALISATION

Week 4: Tariff and Non-Tariff Barriers to Trade

Yuan MEI

2022 – 2023 Term 1

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Recap from Last Week

• “China shock”

• Heckscher and Ohlin’s factor endowment theory

• Other determinants of comparative advantage

• Discussion question: Which groups of Singaporeans are

negatively affected by globalization? What should the
government do?

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Content

• Tariffs
▪ Types
▪ Incentives
▪ Trump Tariffs on Steel and Aluminum

• Non-tariff Barriers
▪ Quota
▪ Restrictions
▪ Product standards
▪ Barriers to trade and non-economic goals

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Tariff

• A tax (duty) levied on a product when it crosses national

boundaries
▪ Import tariff
• Tax levied on an imported product
• Most common; also called a customs duty

▪ Export tariff (tax levied on exports) is less common

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Types of Tariff

• Tariffs may be specific, ad valorem, or compound

• Specific tariff
▪ Fixed amount of money per physical unit of imported
product (Ex: 15 cents/unit).

▪ Consumer price = producer price + specific tariff

▪ Relatively easy to apply and administer

▪ Degree of protection varies inversely with changes in import

prices

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Ad Valorem Tariff

• Ad valorem tariff
▪ Fixed percentage of the value of imported product (Ex: 15%
per unit)

▪ Consumer price = producer price *(1+ ad valorem tariff rate)

▪ Relatively expensive to estimate and administer due to

changing import prices and custom valuation problems

▪ Maintains constant degree of protection for domestic

producers through the business cycle

• Compound tariff: mixture of specific and ad valorem tariff

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Commodity Value in Tariff Calculation

• Imposing ad valorem tariff needs to determine commodity

value

• Free-on-board (FOB) valuation

▪ Tariff is applied to a product’s value as it leaves the
exporting country
▪ Used in the United States

• Cost-insurance-freight (CIF) valuation

▪ Tariff is applied as a percentage of the imported
commodity at its final destination
▪ Used in European countries

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Tariff Rate: United States

Source: World Bank

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Tariff Rates: China

Source: World Bank

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Tariff Rates: India

Source: World Bank

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Zero Tariff Regions

• Free port nations and regions: Singapore, Hong Kong, etc

▪ Only impose tariffs on very few products (alcohol and military
products, for example) for non-economic reasons
▪ Usually with geographical advantages to trade

• Special economic zones with zero tariffs

▪ Free-trade zone: duty-free areas offering warehousing,
storage, and distribution facilities for trade, transshipment, and
re-export operation
▪ Free-trade zone in US is also called foreign-trade zone
▪ Export processing zones: industrial estates aimed primarily at
foreign markets

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Tariffs in Singapore

• 4 categories of dutiable goods:

▪ Intoxicating liquors

▪ Tobacco products

▪ Motor vehicles

▪ Petroleum products and biodiesel blends

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Rule of Origin

• Tariffs are not imposed on domestic products and can be country-

specific

• Need to determine the origin, or "economic" nationality of goods

• Two basic concepts

▪ If only one country is involved the "wholly obtained" concept
will be applied

▪ If two or more countries are involved in the production of

goods, the concept of "last, substantial transformation"
determines the origin of the goods.

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Rule of Origin

• In, general the criterion of last substantial transformation is

expressed in three ways:
▪ By a rule requiring a change of product category

▪ By a list of manufacturing or processing operations

▪ By a value added rule, where the increase of value due to

assembly operations and incorporation of originating
materials represents a specified level of the ex-works
price of the product

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HS Code

Source: https: //cargofromchina.com/hs-code/

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Why Imposing Tariff?

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Let’s watch a video.

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Tariff Revenue

• Revenue generating effects of 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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Tariff Revenue

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Trade-off Between Producers and Consumers

• Tariff can be used to improve welfare

• Trade-off
▪ Higher prices of imports: consumers are worse off
▪ Imports becomes less competitive: more income for
domestic producers

• Two possible scenarios

▪ Home country is small => foreign supply curve is flat
▪ Home country is large => foreign supply curve is upward-
sloping
Case 1
Case 1 with Tariff
Case 1 with Tariff

• Benefit of tariff
▪ Increase in domestic supply (domestic firms)
▪ Tariff revenue

• Cost of tariff
▪ Decrease in quantity consumed by domestic consumers

• When home country is small

▪ Foreign supply curve is flat
▪ Foreign producers still receive PW

• Cost always outweighs benefit => Imposing tariff does not

improve domestic welfare
Case 2
Case 2 with Tariff
Case 2 with Tariff
• Benefit of tariff
▪ Increase in domestic supply (domestic firms)
▪ Tariff revenue

• Cost of tariff
▪ Decrease in quantity consumed by domestic consumers

• When home country is large

▪ Foreign supply curve is upward sloping
▪ Foreign producers receive PT < PW, hence absorbing part of
the tariff

• It is possible to have benefit > cost => tariff can improve

domestic welfare

• Note: our analysis does not include retaliation

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Political Incentive
• Lobbying: the act of attempting to influence the actions,
policies, or decisions of officials in their daily life, most
often legislators or members of regulatory agencies.

• Legal in the US and many other democratic countries

• Firms are more likely to form lobby groups than consumers

▪ More aligned incentive
▪ Easier to organize

• Protected firms enjoy more profit at the expense of average

citizens

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Agricultural Products from Japan

Source: http://www.fruittradecoach.com/japanese-fruit-boutique.html
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Trump Tariffs on Steel and Aluminum

• On March 8 2018, US President Donald Trump formally

announced new tariffs on imported steel (25 percent) and
aluminum (10 percent)
▪ Applies globally but four countries are permanently
exempted: South Korea, Argentina, Brazil and Australia

• Legal basis: Section 232 of the Trade Expansion Act of 1962

▪ US President is allow impose tariffs based on the
recommendation from the U.S. Secretary of Commerce if "an
article is being imported into the United States in such
quantities or under such circumstances as to threaten or
impair the national security."

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Let’s watch a video.

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Will Americans benefit?

• Initiative on Global markets from Booth Business School at

University of Chicago put that question to its Economic
Experts Panel

• Established economists from top US economics departments

• Results
▪ 40/43 responded
▪ For those who responded
• 24% disagree
• 76% strongly disagree 32
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Some Responses

• Eric Maskin (Harvard):

▪ I thought we had learned our lesson with Smoot-Hawley

• Richard Thaler (Chicago);

▪ In net we want more trade not less. This is unlikely to help and
runs the risk of starting a trade war. SAD

• Oliver Hart (Harvard):

▪ A robust result is that free trade increases national income. The
cases where this is not true are rare and hard to spot.

• Ken Judd (Stanford):

▪ They may help SOME Americans SIGNIFANTLY but the
number is small and the costs to others will far exceed the
gains. 33
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Paul Krugman’s Comment

• “these tariffs are weirdly poorly considered even if all you

want to do is create manufacturing jobs, leaving aside all the
other ramifications.”

• Steel is an intermediate good

▪ Used as input in US manufacturers

• Tariff on steel
▪ Benefits steel factories
▪ Other US manufacturers become less competitive

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Discussion

What do you think of Singapore’s tariff

policy? Should the government include
more or less categories of dutiable goods?

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Non-Tariff Barriers

• Non-tariff barriers: policies other than tariffs that restrict

international trade

• Can have many forms

▪ Quota/ban
▪ License
▪ Domestic content requirement
▪ Regulations
▪ Border inspection procedures

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Quota

• Absolute quota: physical restriction on quantity of goods

imported during a specific time period

• Tariff-rate quota
▪ Two components
• Quota that defines maximum volume of imports and
charges within-quota tariff
• An over-quota tariff

• Discouraged by World Trade Organization

▪ WTO members agreed to eliminate absolute quotas and
replace them with tariff-rate quotas and eventually tariffs

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Tariff-Rate Quota Example

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Japan’s Export Restrictions

• July 1st 2019: Japan tightened control over three chemicals
that are crucial to producing semiconductors
▪ Japanese companies would need a license to export to South
Korea, and the process could take up to 90 days
▪ Removing South Korea from its “white list” => even
more delays

• Semiconductors have been South Korea’s top export item

• South Korea’s response

▪ Protests
▪ Boycott Japanese consumer products
▪ Terminated military intelligence-sharing pact with Japan
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Japan’s Export Restrictions

• Official reason: national security concerns
▪ Japanese officials said some South Korean companies
were inadequately managing the chemicals, implying that
some were being leaked to North Korea for military
applications
▪ South Korea denied such claims and called for
investigations from the United Nations

• Actual reason (probably): South Korean court ruling against

Japan’s use of forced labor during World War II
▪ Japanese companies ordered to compensate those victims
▪ Japanese government: had already paid restitution through a
1965 agreement in which they gave Seoul $500 million in aid

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Sanctions against Russia

https://www.piie.com/blogs/realtime-economic-
issues-watch/russias-war-ukraine-sanctions-timeline

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Examples of Trade-Related Sanctions

• The European Union and the United States

▪ Import ban: wood, cement, fertilizers, seafood, and liquor...
▪ Export ban: jet fuel, luxury goods, quantum computers,
semiconductors
▪ Eventually bans imports of crude oil and petroleum products
with limited exceptions (European Union)

• Australia bans imports of oil, coal and exports of aluminum

• Japan bans exports of semiconductors, luxury goods, trucks,

bulldozers and “cutting edge goods”

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Singapore Sanctions against Russia

https://www.mfa.gov.sg/

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1933 Buy American Act

• Requires federal agencies to purchase materials and products

from U.S. suppliers if their prices are not “unreasonably”
higher than those of foreign competitors

• To qualify as “domestic product,” must have at least 50%

domestic component content and be manufactured in U.S.

• U.S. suppliers of civilian agencies – preferences over foreign

firms
▪ 6-12% preference margin
▪ 50% preference margin for Department of Defense

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Product Standards

• Because of the drastic reduction in tariffs in past decades,

there is increasing attention on trade barriers associated with
product standards

• Differences between standards and tariffs

▪ Tariffs increase the marginal cost of products reaching
consumers

▪ Product standards can affect both the marginal cost and

fixed cost of production

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Standards and Fixed Cost

Source: www.wonpro.cc 46
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My Research

• In my working paper, I find that

▪ Relative to goods that do not use plugs, less electronics are
exported to destination countries with incompatible plugs

▪ Incompatible plugs also reduce the number of firms

exporting electronic devices

▪ Electronic products exported to destination countries with

incompatible plugs on average have inferior product quality
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Standards and Marginal Cost

Source: www.irishtimes.com
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Features of Product Standards

• Product standards can serve legitimate domestic policy goals
and affect the welfare of consumers directly through non-
monetary means
▪ Health

▪ Product safety

▪ Environment

• Tariffs only affect welfare through monetary channel

▪ Tariffs per se are neither good nor bad
▪ The effect of tariffs on prices and hence quantities can
affect welfare

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https://thecounter.org/uk-farmers-new- 50
agriculture-bill-us-farm-imports-brexit-eu/
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https://www.abc.net.au/news/2012-06-29/an-banana-
exporters-caught-in-philippines-china-dispute/4100422 51
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Quiz Time

https://www.wooclap.com/ECON113L4
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After Class Discussion

• Discussion question: Consider the examples discussed in this

lecture as well as those discussed in the articles on Elearn.
Should trade policies be used to threaten other countries and
achieve non-economic goals?

• Please read this week’s supplementary materials on Elearn

• Discussion at the beginning of next week’s class

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