Course Title:

International Economics

Instructor: Jia Huey (Jessica) Hsu

124116@mail.tku.edu.tw
Research Room: B1123

TLFBB4A
DIVISION OF GLOBAL COMMERCE,
DEPARTMENT OF INTERNATIONAL
BUSINESS
2022
 1

The instruments of
Trade Policy
In this week’s ➢ Introduce the instruments
class, you will of trade policy
learn about:
➢ Evaluate the costs and
benefits of tariffs as well as
their welfare effects
The instruments of Trade Policy

➢ Tariffs
➢ Export subsidies
➢ Import quotas
➢ Voluntary export restraints

2
 What is a tariff?

In the context of
international trade, a Tariffs applied to imports
tariff or customs duty are usually collected by
is a financial charge in customs officials of the
the form of a tax, importing country when
imposed at the border goods are cleared
on goods going from through customs for
one customs territory to domestic consumption.
another.
The WTO Schedules of concessions
➢ For trade in goods, the WTO Schedules of concessions
record each member's tariff bindings, and other
concessions resulting from trade negotiations.
➢ Each member has its own WTO Schedule of concessions,
except for members that are part of a customs unions
(e.g. the European Union), that may have a single common
Schedule for all the members of the union.
➢ Most WTO members' Schedules of concessions on goods
are based on the Harmonized Commodity Description and
Coding System - Harmonized System (HS).
Source: WTO,
https://www.wto.org/english/res_e/webcas_e/ltt_e/ltt5_e.htm
 Harmonized System Codes (HS Code)

Source: https://www.wto.org/english/tratop_e/schedules_e/goods_schedules_table_e.htm

Current situation of schedules of concession in

goods - Chinese Taipei
 Case Study

Agreement between New Zealand and the Separate Customs Territory

of Taiwan, Penghu, Kinmen, and Matsu on Economic
Cooperation(ANZTEC), 10 July 2013
Tariff Schedule of Taiwan with respect to Goods Originating in New Zealand
Tariff Schedule of Taiwan with respect to Goods Originating in New Zealand
Two of
the most
common
types of
tariffs

Types of tariffs
One of the basic principles of the
WTO
More open and predictable trade

➢ The progressive reduction

and binding of tariffs
➢ The reduction of other
barriers to trade
quantitative restrictions
(e.g. quotas)
tariff quota
 What is a tariff quota? 12

A tariff quota is a two-tiered import tariff

system. The first tier has a lower tariff rate
that applies up to a specified quantity of in-quota
imports. The second tier has a higher tariff
rate that applies to imports in excess of the
quota quantity.
For example, China’s annual quotas are 9.64 million tons for wheat, 7.2
million tons for corn and 5.32 million tons for rice, which can be imported
at a tariff rate of 1%.
Chinese tariffs for grain commodities were 1% for in-quota and 65%
for out-of-quota imports.
➢ World Equilibrium
➢ Effects of a Tariff
Effects of a Tariff in a Small Country
Effects of a Tariff in a Large Country
➢ Consumer and Producer Surplus
 ➢ Consider how a tariff affects a
Supply, single market, say that of cheese.
Demand, and ➢ Suppose that in the absence of
Trade in a trade the price of cheese is
higher in Home than it is in
Single Foreign.
Industry ➢ With trade, cheese will be
shipped from Foreign to Home
until the price difference is
eliminated.
14
An import demand curve is the difference between the quantity that Home
consumers demand minus the quantity that Home producers supply, at each
price.
The Home import demand curve: MD = D − S
An export supply curve is the difference between the quantity that Foreign
producers supply minus the quantity that Foreign consumers demand, at each
price.
The Foreign export supply curve: XS = S* - D*

16
The equilibrium
world price (Pw)
is where Home
import demand
(MD curve)
equals Foreign
export supply (XS
curve).
 18

➢ A tariff raises the price of a good in

the importing country, so it hurts
consumers and benefits
producers there.
Costs and ➢ In addition, the government gains
Benefits of tariff revenue.
➢ How to measure these costs and
Tariffs benefits?
➢ Use the concepts of consumer
surplus and producer surplus.
➢ Consumer surplus measures the amount that consumers
gain from purchases by computing the difference in the price
actually paid from the maximum price they would be willing to
pay for each unit consumed.
When price increases, the quantity demanded decreases as well as
the consumer surplus.

➢ Producer surplus measures the amount that producers gain

from sales by computing the difference in the price received
from the minimum price at which they would be willing to sell.
When price increases, the quantity supplied increases as well as the
producer surplus.

19
Consumer Surplus and Producer Surplus

20
 Measuring the Costs
and Benefits of Tariffs
Net Welfare Effects of
a Tariff
A Small Country
VS.
A Large Country
21
The Home import demand curve: MD
The Foreign export supply curve: XS

Free Trade

22
 Example
1.The figure below illustrates the effects (the costs and
benefits) of a tariff ( t dollars) for the Home and World
Markets.
If we consider the Home country a large country, its tariff
will change the world price. The tariff shifts up the World
Market’s supply curve from X* to X*+t.
The effects on different groups can be expressed as the
areas of six regions, labeled a, b, c, d, e, and f. Please
answer the following sub-questions.
 Example
1.1 Please briefly explain the efficiency loss and then indicate which two
areas they are.
1.2 Refer to the below figure. The producer surplus rises by area a,
while the consumer surplus falls by areas indicated by a + b + c + d.
Which areas represent the government’s revenue? What is the net
effect of a tariff in the Home Market?
1.3 How do we know whether the tariff will be an effective trade policy in
a large country?
1.4 Refer to the below figure. What areas represent the global efficiency
loss when a large country applies a tariff as its trade instrument?
c
e

the global efficiency loss

e – (b+d) + (-e-f)
= -(b+d+f)

26
 • For a large country, whose imports
and exports affect world prices, the
welfare effect of a tariff is ambiguous.
Measuring • The triangles b and d represent the
the Costs and efficiency loss.
Benefits of Production distortion and
consumption distortion
Tariffs
• The rectangle e represents the terms
of trade gain.
The tariff lowers the Foreign price
27
 The Effects of Trade Policy

➢ For each trade policy, the price rises in the Home

country adopting the policy.
• Home producers supply more and gain.
• Home consumers demand less and lose.
➢ The world price falls when Home is a “large” country
that affects world prices.
➢ Tariffs generate government revenue; export subsidies
drain it; import quotas do not affect government revenue.
 The Effects of Trade Policy

➢ All these trade policies create production and

consumption distortions.
➢ The welfare effect of a tariff, quota, or export subsidy
can be measured by
• efficiency loss from consumption and production
distortions.
• terms of trade gain or loss.
Table 9.1 Effects of Alternative Trade Policies

Policy Tariff Export Subsidy

Producer surplus Increases Increases

Consumer surplus Falls Falls

Government Increases Falls (government

revenue spending rises)
Overall national Ambiguous (falls for Falls
welfare small country)
Source: Krugman, P., Melitz, M., & Obstfeld, M. (2018).International Economics: Theory and Policy, 11th Edition, Global
Edition. Pearson, p.259. 30
Table 9.1 Effects of Alternative Trade Policies
Voluntary Export
Policy Import Quota Restraint
Producer surplus Increases Increases

Consumer surplus Falls Falls

Government No change (rents to No change (rents to

revenue license holders) foreigners)
Overall national Ambiguous (falls for small Falls
welfare country)
The revenue from selling imports at high prices goes to quota license
holders. These extra revenues are called quota rents.
31
32
What do you think about this tweet after
learning the trade policy instruments?
US-China trade
war and its
impact on the
multilateral
trading system
America v China: why the trade war won't end soon
Source: The Economist https://www.youtube.com/watch?v=ErwIlvQ_RVk&t=311s
 Exercise

1. What is a TRUE statement concerning the imposition in the

U.S. of a tariff on cheese?
A) It lowers the price of cheese domestically.
B) It raises the price of cheese internationally.
C) It raises revenue for the government.
D) It will always result in retaliation from abroad.
Answer:
36
 Exercise

1. What is a TRUE statement concerning the imposition in the

U.S. of a tariff on cheese?
A) It lowers the price of cheese domestically.
B) It raises the price of cheese internationally.
C) It raises revenue for the government.
D) It will always result in retaliation from abroad.
Answer: C
37
 Exercise

2. The main redistribution effect of a tariff is the transfer of

income from
A) domestic producers to domestic buyers.
B) domestic buyers to domestic producers.
C) domestic producers to domestic government.
D) domestic government to domestic consumers.
Answer:

38
 Exercise

2. The main redistribution effect of a tariff is the transfer of

income from
A) domestic producers to domestic buyers.
B) domestic buyers to domestic producers.
C) domestic producers to domestic government.
D) domestic government to domestic consumers.
Answer: B

39
 Exercise

3. An export subsidy will ________ producer surplus, ________

consumer surplus, ________ government revenue, and
________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous
effect on
D) increase; decrease; have no effect on; decrease
Answer:
40
 Exercise

3. An export subsidy will ________ producer surplus, ________

consumer surplus, ________ government revenue, and
________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous
effect on
D) increase; decrease; have no effect on; decrease
Answer: B
41
 Exercise

4. An export tariff will ________ producer surplus, ________

consumer surplus, ________ government revenue, and
________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous
effect on
D) increase; decrease; have no effect on; decrease
Answer:
42
 Exercise

4. An export tariff will ________ producer surplus, ________

consumer surplus, ________ government revenue, and
________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous
effect on
D) increase; decrease; have no effect on; decrease
Answer: A
43
44
45