Economics of International Trade

Dr. Rasha Qutb

2023/2024

Barriers to Trade
Tariffs
The main Points
1. Definition of Tariffs
2. Purposes/ main functions of Tariffs
3. Types of Tariffs
4. Methods of valuing the imports
5. Nominal Tariffs VS effective rate of Tariffs

Q (1): what’s meant of Tariffs?

A Tariff:
● It is a tax on imported goods.

Q (2): List and describe the various Functions/ Purposes of Tariffs.

Tariffs have three primary functions: to serve as a source of revenue, to protect domestic industries, and to
remedy trade distortions (punitive function).

Revenue tariff Protective tariff Punitive tariff

-An import tax levied on a good
that is not produced domestically
to raise money (revenue)
-It is used in developing countries It is used in a middle- & high-income
because:
● The alternative methods are
income tax or sales which
require a certain level of
efficiency to be effectively
collected.
- a tariff designed to protect a domestic A tariff that may be used to remedy trade
industry from foreign competition
country to:
● Protect comparative advantage
industries from import
competition.
distortions resulting from measures adopted
by other countries.
For example
● The Antidumping Agreement allows
countries to use “antidumping-duties" to
remedy proven cases of injurious
dumping
● The Subsidies Agreement allows
countries to impose countervailing duties
when an exporting country provides its
manufacturers with subsidies that
damage the domestic industry of an
importing country.

Q (3): List and describe the various Types of Tariffs.

Specific tariff Ad valorem tariff Compound tariff
Definition A per unit tax on imported goods. A percentage of the value of the A mixed of both
(Fixed) imported good. (Fixed+ Change)
(Change)
Example ● 6$ per Car 4% of the value or price of a car ● 6$ + 4%

advantages -Easy to administer -Not Regressive in nature: -Common on

-Work best on Homogenous/ same (Fair) as poor pay less than the rich products whose
products as Tariffs is a (%) of the value of a prices fluctuate
good. (Agricultural
products)
Disadvantages - Regressive in nature - Not easy to administer
(Unfair) because the impact of specific It requires valuation of the good
Tariffs on poor will be more than rich
people as : price of good↑
- The impact of Tariffs↓
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Economics of International Trade
Dr. Rasha Qutb
2023/2024

Q(4): Describe the different methods of valuing imports.

• foreign market
price plus costs of
loading plus inter-
country
• foreign market transportation
price before Free on Board (F.O.B) costs up to port of
loading for entry.
shipment •C.I.F= F.O.P + inter country
transportation costs up to
port of entry.

• foreign market
Free Alongside price plus costs
of loading
(F.A.S.)
Cost, Insurance, and
Freight (C.I.F.)

Q (5): what’s meant by nominal Tariffs and the effective rate of Tariffs?

# Nominal Tariffs: is the rate that’s imposed on final product

N.B: The nominal rate of tariff is not the appropriate measure of the degree of protection.

# The Effective Rate of Protection (ERP): Indicates how much protection is actually provided to domestic
producer of import- competing commodity.

When a nation imposes a lower tariff on imported inputs than on the final commodity produced with the inputs,
the rate of effective protection exceeds the nominal Tariffs rate.

ERP depends on:

o Tariff on final good
o Tariffs on intermediate inputs(components) for that good

● Must consider Tariffs on the value of product produced domestically

● ERP could be measured by 2 methods:

𝟏) 𝑬𝑹𝑷 = 𝒕−𝒂𝒊 𝒕𝒊
2) 𝑬𝑹𝑷 =
𝐕𝐚𝐥𝐮𝐞 𝐚𝐝𝐝𝐞𝐝(𝐚𝐟𝐭𝐞𝐫 𝐭𝐚𝐫𝐢𝐟𝐟𝐬)−𝐕𝐚𝐥𝐮𝐞 𝐚𝐝𝐝𝐞𝐝 𝐮𝐧𝐝𝐞𝐫 𝐟𝐫𝐞𝐞 𝐭𝐫𝐚𝐝𝐞) 𝟏−𝐚𝐢
*100
𝐕𝐚𝐥𝐮𝐞 𝐚𝐝𝐝𝐞𝐝( 𝐮𝐧𝐝𝐞𝐫 𝐟𝐫𝐞𝐞 𝐭𝐫𝐚𝐝𝐞)

t: nominal tariff rate on final good

ai: ratio of cost of imported input to price of final good with no tariff

ti: nominal tariff rate on imported inputs

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Economics of International Trade
Dr. Rasha Qutb
2023/2024

Question (1): Suppose that DVD player sells for $200 under free trade, and the imported components of DVD
sell for $100, suppose a 20% tariff on imported final products, 10% Tariffs on imported components, what is
ERP?
The solution
ERP = (the value added after imposing Tariffs- the value added under free trade)/ the value added under free
trade *100
VA= value of output - the value of inputs
VA (under free trade) =200-100=$100
VA( after imposing Tariffs) = (200*1.2) - (100*1.1) = 240-110=130
ERP=[ (130-100)/100]*100= 30% ( positive protection)

*Another solution*
By *applying 1st rule*
T.final good = 20%
T.components= 10%
ERP  (T f  aTc ) /(1  a )
a  100 / 200  0.5
T f  20%, Tc  10%
0.20  0.5(0.1)
ERP   .30  30%
(1  0.5)

If imported components 150$ instead of 100$, what is ERP?

ERP  (T f  aTc ) /(1  a)
a  150 / 200  0.75 a↑ → ERP
T f  20%, Tc  10% ↑
0.20  0.75(0.1)
ERP   .30  50%
(1  0.75)

EX: 2
Suppose that a bottle of juice sells for $1 and contains $0.20 of imported inputs. If the tariff on juice is 20
percent and the tariff on imported inputs is 5 percent, what is the effective rate of protection?
The solution
Tf=20%
Tc=5%
a=(0.20/1)*100 = 20%
ERP = (Tf – a.Tc) / 1-a
ERP= (20%-20% (5%))/ 1-20% = 23.75%
The Effective Rate of Protection is 23.75%

NOTE: ERP could be Negative

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Economics of International Trade
Dr. Rasha Qutb
2023/2024

MCQ
1. The purpose of a protective tariff is:
a.to protect domestic consumers from harmful products.
b.to protect the international laws of commerce.
c.to protect the foreign country from anti-trust actions.
d.to protect domestic producers from foreign competition.

2. Specific Tariffs are collected:

a. only on industrial products.
b. only on pharmaceutical products.
c. only on products that arrive by train.
d. as a fixed amount of money per unit traded.

3. A tariff of 20% on imported goods is called:

a. a specific tariff.
b. a percentage Tariffs.
c. an ad valorem tariff.
d. a compound Tariffs.

4. A tariff of ($250/import + 15% of the C.I.F. value/import) is known as a(n) _____ tariff.
a. nonspecific b. ad valorem
c. compound d. specific

5. The Free alongside (FAS) method of valuing imports:

a. defines the price of the imported good as the foreign market price before it is loaded into the ship,
train, or plane for shipment to the importing country
b. defines the imported price as the price in the foreign market including the cost of loading it onto the
ship, train, or plane for shipment to the importing country.
c. defines the imported price as the price including all inter-country charges up to the importing
country’s port of entry.
d. none of the above

6. The FOB value of imports includes:

a. the value of the product alongside the carrier.
b. the expense of loading for shipment.
c. all freight and insurance costs to transport the goods to the importing country.
d. the sum of a and b.

7. Almost all countries in the world use which of the following definitions to assess the value of an
import?
a. TTK b. JIT
c. CIF d. JMK

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Economics of International Trade
Dr. Rasha Qutb
2023/2024

True False Questions

1. A compound tariff is a theoretical possibility that never occurs in practice.
(F , A compound tariff occurs in practice as: Agriculture products)
2. The effective rate of protection for a product can be negative.
T, As The general formula for determining the effective rate of protection is:
ERP = (Tf - aTc )/(1 - a)
The effective rate of protection can even be negative. This occurs when the tariff on imported components
multiplied by the percentage of imported inputs into the production process is larger than the tariff on the
final good.

3. imposing a tariff can increase the level employment in the protected industry.
T, because it protects domestic production of a good so increase employment but not increase the Overall level
of employment.