The Economic Costs of Tariffs & The Economics of Protectionism

What happens when tariff is

imposed?
There are 3 effects:
1. The domestic producers can expand
production
2. Consumers are faced with higher
prices and therefore reduce their
consumption
3. The government gains tariff
revenue
 What is economic cost of a
Tariff?
The Economic cost of a tariff
measures the gains and losses from
imposing tariff in terms of
Production efficiency loss
Consumer loss
Terms of trade gain
In a small country: That can
not effect the world price
The imposed tariff will raise the
domestic price at the amount of a tariff
itself which will lead to:
Efficiency loss (loss of inefficient
domestic production and consumer loss)
which is higher than terms of trade gain
(which is not available as the country is
too small to effect the world price)
 In a Large country: That can effect the
world price by its demand
The imposed tariff will raise the
domestic price at the amount of a
tariff itself which will lead to:
Efficiency loss (loss of inefficient
domestic production and consumer
loss) which will be lower than terms
of trade gain (the gain from lower
export prices )
 Cost and Benefits of a tariff
If the efficiency loss is more than the
terms of trade gain the tariff is costly
for importing country (case of small
country)
If the efficiency loss is less than the
terms of trade gain the tariff is
beneficial for importing country (case
of large country)
 The Economics of
Protectionism
Why would the countries impose tariff
and non-tariff barriers?
1. Noneconomic Goals
2. Import relief
3. Tariffs for infant Industries
4. Tariffs and Unemployment
 Noneconomic goals
Countries may desire to preserve their
cultural traditions or environmental
conditions
Case example:
France recently has argued that its citizens
need to be protected from “uncivilized”
American movies. The fear than French
film industry can be crowded out by high-
budget Hollywood films. As result France
has maintained strict quotas on the number
of US movies.
 Import relief
Antidumping tariffs: are used when
foreign countries (exporters) sell to
the home country at prices much
lower than those in the home
market.
When dumping is found the
“antidumping tariff” is put on
imported good.
 Import Relief

Countervailing duties: are

imposed when foreigners
(exporters) subsidize
exports to the home
country.
 Tariffs for infant industries
According to this doctrine there are lines
of production in which a country could
have comparative advantage if only they
could get started.
If the temporary protection in terms of
tariffs is imposed these industries would
grow and enjoy economies of mass
production, technological efficiency and
became mature industry
Tariffs for infant Industries

Although this protection will

raise prices to the consumer at
first, the mature industry
would become so efficient that
cost and price would actually
fall.
 Tariffs and unemployment
Historically a powerful motive
for protection is the desire to
increase unemployment.
The tariff protection creates jobs
by raising the price of imports and
diverting demand toward
domestic production.
 Who Gets Protected?
Many developing countries
traditionally have protected a wide
range of manufacturing.
The Singapore, South Korea, Taiwan
often protected their manufacturing
industries from imports during the
early stages of industrialization.
 Who gets protected?
The range of protectionism in advanced
countries is much narrower and is
concentrated in two sectors: agriculture
and clothing
The EU case: The example can be the
Europe’s Common Agricultural Policy
(export subsidies)
 Who gets protected?
In Japan: The Government has traditionally
banned imports of rice, this ban was slightly
relaxed in mid-1990s because of bad harvests,
but in late 1998s Japan imposed 1,000 percent
of tariff on rice imports.
The United States: Much of protection in
United States is concentrated on the clothing
industry, but since 2013 the removal of trade
restrictions is being implemented.
 Multilateral and Regional Trade
Negotiations
At the end of World War II, the
international community established a
number of institutions to promote the
international trade:
Multilateral agreements
General Agreement on Tariffs and Trade or
GATT
After GATT the World Trade Organization
was established in 1995
 Regional Approaches
One of the most important
regional agreements are:
NAFTA – North American Free
Trade Agreements
European Union
 Multilateral Agreements
After the World War II, in 1947 the 23
countries began trade negotiations under
the provisional set of rules known as
GATT, which an agreement not the
organization.
In 1995 the GATT was replaced by World
Trade Organization which became formal
organization promoting international
trade.
 WTO
Currently WTO has 162 member states,
which account for more than 90% of of
International Trade.
The biggest ones:
US (in 1995) Canada (in 1995)
EU (in 1995) Russian (in 2012)
China (in 2001)
 WTO core principles
Principles of WTO:
Countries should work to lower trade barriers
All trade barriers should be applied on
nondiscriminatory basis across nations
When a country increases its tariffs above
agreed-upon levels it must compensate its
trading partners for the economic injury
Trade conflicts must be settled by consultations
and arbitration
 Regional Agreements:
NAFTA
In 1994, the North American Free Trade
Agreement (NAFTA) was signed and the
contracting partners are neighboring
countries US, Canada and Mexico. The
objective of NAFTA is not only allowing
goods to pass tariff- free across the borders
but also to liberalize regulations on
investments by the United States and
Canada in Mexico.
 European Union
The EU has created the single market
among EU member states, with
minimum barriers to international trade
and capital. That comprises elimination
of all internal tariff and regulatory
barriers to trade and labor and capital
flows, as well as creation of monetary
union. The power of this Union is the
idea that free and open trade promotes
efficiency and technological advance.
 Task for a Seminar

The tasks will be disseminated

on individual basis for each
student to be presented on a
certain date.