Trade Policies

Tariffs and Quotas

Tariffs
Tariff: A tax on import
Specific tariff: a per unit tax on imports
Ad valolrem tariff: a value based tax on
imports
Why impose tariff?

To discourage consumption
To raise revenue
To discourage imports
To protect domestic industries

Tariffs and Economic Welfare

The small country case
The large country case
Effective rate of protection

Measuring Tariff Rates

Tariff rates vary across goods and and
services as well over time
An unweighted average tariff rate
A Weighted average tariff rate: the sum of
weighted tariff rates; for each good the rate
weighted based on the percentage value of
the import of that good relative to the total
value of all imports

The Small Country Case

S

b
Pa
c
Pw+ T
Pw

f
e

g
i

Tariff

k
D

Q1 Q3

Q
Qo

Q4

Q2

The Large Country Case

Sd

Sd+w +t
Sd +w

P1
P0
P2

D
o

q1

q3

q2

qo

Tariffs and Offer Curves

Case of a small country
A`

Good Y

TT

Y1
Y2

Good X
X2

X1

Tariffs and Offer Curves

A`

TT`
A
TT

A tariff is imposed by
Country A
Note the change in the
terms pf trade:TT
0

Optimal Tariff
For a small country: A zero tariff rate
For a large country that can affect the terms
of trade: Maximize the difference between
the gain (s) and the losses (m+r) from a
tariff
The effect of tariffs on input prices

The Effective Rate of Protection

The protective effect of tariff based on the value
added
tf - a.ti
ETR = -----------1- a
a = value of import as % of the value of final good

Export Tax

P0
P1

Dw
Dw -t

Q
0

q2

q4

q3

q1

Non-tariff Barriers to Trade

Quotas
Quantitative restrictions on imports
Voluntary export restrictions
Export subsidies
Dumping
Regulatory and technical standards
Government purchasing policies
How to measure non-tariff barriers

Quota

p1
po

Sd

d
Dd

Tariffs vs Quotas
Greater loss of welfare for the importing
country with quotas
Quotas are less flexible

Sd

Sd

Sd +t

D
D

D
o

q1 q3 qo

q2

q1 q3q2 q4

Export Policies
Export taxes:
Small counties
Large countries

Export subsidies
Voluntary export restraints
Countervailing Duties (Against subsidies)

Sd

Po+s
b

a
c

po
Po-s

Dw +S1
Dw

Dw-S2
e

Dd
Qx
o

q3

q1

qo

q1

Dumping
Sporadic dumping
Persistent dumping
Predatory dumping

Dumping
$

Ph
Pe
MC
De
Dh
MR
o

MR
Q

Export Subsidies
An export subsidy lowers the cost of
production for the produces in the exporting
country.
The cost of a subsidy is borne by the
taxpayers in the exporting country.
An export subsidy lowers the price to the
importing country, resulting in an increase in
the exports for exporting county; that is an
increase in imports for the importing country.

An Export Subsidy from the Perspective of the

Importing Country: A Small Country
Sd

Pw = Pw-s+c

P2
s
P1

Pw -s
D

Non-Tariff Barriers

Technical standards
Regulatory standards
Administrative standards
Domestic-content requirements
Rules of origin
Government-procurement policies

Arguments for Protection

Infant Industry Argument
Imperfect Competition
The Optimal Tariff
The Case of a Monopoly

Strategic Trade Policy

The Learning Curve
Profit Shifting (The Game Theory)

Externalities

Tariffs vs. Subsidies

P

Sd

Sd

Ss
s

Sw + t
c e

Sw

Sw

D
o

Qo Q1

Q2

D
Q o

Qo

Q1

Q2

The Optimal Tariff

Sd
Sd+w +t
s

Sd+w

P2
P0
P2
Dd

International Trade and a Monopoly

Under autarky a monopoly under-produces
Free trade forces a monopoly to behave like
a competitive firm.
A tariff protection for a monopoly is less
restrictive than a quota protection.

Monopolies and Tariffs

MC

Sw +t
Sw

MR
0

Q1 Q2

Q3

D
Q

A monopoly and a Quota

MC

D
MRq
0

Q1 Q2

Q3

Dq
Q4

Trade and Externalities

EB

EB

q1

q2

Positive Externalities
S
Sw +t
D
o

Sw
Q
CE

EB
o

Negative Consumption Externalities

S
Sw +t
Sw

Q
CE