Tariff:An Instrument

of Trade Policy

Presented By :Mohammad Tarequl Islam

ID :1930408
Course : International Trade Theory
 A Tariff is a tax imposed by one country on the goods and services
imported from another country.

Specific Tariff -is imposed as a fixed charge per unit

of imports
Ad valorem tariff-A tariff rate charged as percentage
of the price

Why Tariff's Used

• Protecting Domestic Employment
• Protecting Consumers
• Infant Industries
• National Security
 • Here,
Price
Increase in producer • Tariff is P1  P2
surplus (1) • The tariff leads to
Net welfare loss (2,4) a decline in
imports. Imports
S were Q4Q1.
Government tariff
revenue (3) After the tariff,
imports fall to
Q3Q2
• Consumer surplus
falls by 1+2+3+4
• Government
raises tariff
revenue of area 3
P2 S + tariff
• Domestic
suppliers gain an
1 2 3 4 increase in
P1
S producer surplus
of area 1
D
• The net welfare is
Q1 Q2 Q3 Q4
(2+4)
Q
 Government tariff
Tariff revenue = tariff × q. of imports
revenue

Effect of Consumer surplus

This is the difference between the price
consumers pay and the price they are willing

Tariffs
to pay; therefore we find the area of the
triangle between demand curve and price

The difference between the price and the price firms

Producers surplus are willing to supply at

 gain in producer surplus + gain in tariff revenue –

Welfare effect of tariffs) loss of consumer surplus
 Reasons for
imposing
Tariffs
Governments may impose tariffs to raise
revenue
2.The most common reason for a tariff.
Imposing
import tariffs makes domestic firms more
competitive and protect domestic industries
from foreign competition
3.By making foreign-produced goods more
expensive, tariffs can make domestically
produced alternatives seem more attractive.
4.A tariff could be placed on goods who may
have negative externalities. 
Reasons for
removing
Tariffs
1.Trade liberalization involves removing barriers to
trade such as tariffs on imports.
2.Free trade areas will have no tariffs between
member states, though they may have a common
external tariff if it is a customs union.
3.Lower prices for consumers
4.Increase specialization and benefits from economies
of scale.
5.Theory of comparative advantage states net welfare
gain from free trade.
6.The reduction of tariffs leads to trade creation.
 With Higher Tariff
Advantage and Disadvantage
Advantage
Disadvantage

• Domestic Industries • Foreign exporters

• Domestic
uncompetitive on world
markets. consumers who
• Workers in these pay higher prices.
• Some domestic
domestic countries.
• Government Tax revenue industries who see
increase by an amount. lower demand due
to more spent on
import.
THANK YOU
THANK YOU
EVERYONE