Lecture 07 08 - Tariff Trade Policy

IMPORT - EXPORT MANAGEMENT M.Sc.
Uyen NGO
TRADE POLICY
School of
Industrial Engineering and Management
HCMIU-VNU
CONTENT Title 1
Section ABC
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Section ABC
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Section ABC
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Section ABC
I M P O RT - MANAGEMEN
E X P O RT T
1. Basis Tariff Analysis
2. Cost and Benefits of a tariff
3. Other instruments of trade policy
M.Sc. Uyen NGO School of Industrial Engineering and Management 2

1. BASIS TARIFF ANALYSIS
E X P O RT T
• Free trade refers to a situation where a government does not attempt to

restrict what its citizens can buy from another country or what they can
sell to another country.
• While many nations are nominally committed to free trade, they tend to
intervene in international trade to protect the interests of politically
important groups.
Question: How do governments intervene in

international trade?

E X P O RT T
By using instruments of trade policy:

1. Tariffs
2. Subsidies
3. Import quotas
4. Voluntary export restraints
5. Local content requirements
6. Antidumping policies
7. Administrative policies

E X P O RT T
• A tariff is a tax levied on imports that effectively raises the cost of

imported products relative to domestic products
• Specific tariffs are levied as a fixed charge for each unit of a
good imported
$3/barrel of oil
• Ad valorem tariffs are levied as a proportion of the value of the

imported good
25% value of imported container

E X P O RT T
Question: Why do governments impose tariffs?
• Tariffs
• increase government revenues
• provide protection to domestic producers against foreign competitors
by increasing the cost of imported foreign goods
• force consumers to pay more for certain imports
• Tariffs are pro-producer and anti-consumer, and tariffs reduce the overall
efficiency of the world economy

E X P O RT T
• Determine tariff: + Business category (Export processing enterprise,

Manufacturing & Trading, Commercial & Trading company, etc.)
+ Type of product/material imported –
corresponding number from Harmonized Commodity Description and
Coding System (HS code - World Customs Organization , 1988)
+ Use purpose (sample, fixed assets,
production material, spare part for maintenance, temporarily imported,
re-import the exported goods, etc.)
+ Free trade agreements involved (FTA)
+ Certificate of origin (C/O)

E X P O RT T
EX: a company in Vietnam imports dishwasher of household types (HS

code 84221100):
Export country Free trade agreement Import tariff

Argentina Most-favoured nations (MFN) 20%
Thailand ATIGA 0%
Belarusia VN-EAEU FTA 12.7% (C/O form EAV)
Japan AJCEP 9% (C/O form AJ)
• Free Trade Agreement (FTA): multinational agreement to form a free-

trade area between the cooperating states, providing preferential tariff
treatment, investment, intellectual property, government procurement,
etc.,
• To September 2020, Vietnam has joined 13 FTAs, for instances:
E X P O RT T
FTA Trade partners

AFTA ASEAN countries
ACFTA ASEAN & China
AIFTA ASEAN & India
VKFTA Vietnam & Korea
AANZFTA ASEAN, Australia, New Zealand
EVFTA Vietnam & EU (Signed but not yet come into force)

1. BASIS TARIFF ANALYSIS: SUPPLY, DEMAND, AND TRADE IN A SINGLE
INDUSTRY
E X P O RT T
Consider how a tariff affects a single market, say that of wheat.

• Absence of trade:
Wheat will be traded from where to where?
 declines, increases until difference in prices is eliminated.

 To determine the world price and the quantity traded, it is helpful to define
two curves: the Home import demand curve and the Foreign export supply
curve.

INDUSTRY
E X P O RT T
Import demand = Home demand – Home supply

• The Home import
demand curve
MD = D – S
intercepts the price axis
at and is downward
sloping:
As price increases, the
quantity of imports
demanded declines.

INDUSTRY
E X P O RT T
EXAMPLE: Home demand

• Suppose Home has demand P = 14 – Q and
supply P = 6 + Q. What is Home autarkic price (before trade)?
14 - = 6 + → = 4
= 14 - = 14 - 4 = 10
• What is Home import demand curve?
P = 14 - Q → QD = 14 - P
P = 6 + Q → QS = -6 + P
QM = QD - QS = 14 - P - (- 6 + P) = 20 – 2P
 P = 10 -

INDUSTRY
E X P O RT T
• Foreign export
supply curve
XS* = S* – D*
intersects the price
axis at PA* and is
upward sloping:
As price increases,
the quantity of
exports supplied
rises.

INDUSTRY
E X P O RT T
Example: Export Supply
Suppose Foreign has demand P* = 12 – Q* and supply P* = Q*.
What is Foreign autarkic price? What is Foreign export supply curve?
12 -QA* = QA* → QA* = 6 P* = 12 − Q*  = 12 − P*

PA* = 12 -QA* = 12 - 6 = 6 P* = Q*  = P*
X* = − = P * −(12 − P*)
 X*= −12 + 2P* → P* = 6 +

INDUSTRY
E X P O RT T
In equilibrium,
import demand = export supply
 home demand – home supply

= foreign supply – foreign demand,
 home demand + foreign demand

= home supply + foreign supply
world demand = world supply

INDUSTRY
E X P O RT T
EXAMPLE: WORLD EQUILIBRIUM
What is the world price under free trade?

QM = QX* → 20 - 2P = -12 + 2P → P = 8
• What are Home imports at this price?

QM = 20 - 2P = 20 - 2(8) = 20 -16 = 4
• What are Foreign exports at this price?

QX* = -12 + 2P* = -12 + 2(8) = 4

INDUSTRY
E X P O RT T
At this price in each country:
Home Foreign
Quant. demanded
6 4
Quant. supplied
2 8
How to come up with these results?

INDUSTRY
E X P O RT T

1. BASIS TARIFF ANALYSIS: EFFECTS OF A TARIFF
E X P O RT T
• From the point of view of someone shipping goods, a tariff is just like a
cost of transportation.
No tariff: Pw in 2 countries are the same
 Sellers are unwilling to ship goods unless the Home price exceeds the
Foreign price by the amount of the tariff t (a specific tariff: t per unit of
wheat)

E X P O RT T
If no wheat is being shipped, excess demand in H & excess supply in F price

in H  price in H & in F until the price difference is t.
E X P O RT T
- Without tariff, price in H =

price in F =
- With tariff,
- In H, =>
=> D S , import
demand
In F, =>
ÞD S , export
supply
=> The volume of wheat

traded from to
21

E X P O RT T
The quantity of Home imports demanded equals the quantity of Foreign

exports supplied when
• The increase in the price in Home can be less than the amount of the
tariff.
– Part of the effect of the tariff causes the Foreign export price to decline.
– But this effect is sometimes very small.

E X P O RT T
When a country is small, a tariff it imposes
cannot lower the foreign price of the good it
imports because its demand is an insignificant
part of world demand for the good.
– The foreign price does not fall, but remains at Pw

– The price in the home market rises by the full
amount of the tariff, to PT = Pw + t
Þ Production of the imported goods :

Þ Consumption of goods :
Þ Imports fall in the country imposing the tariff.
Tariff on small country

E X P O RT T
Example: Tariff for a Large Country
Suppose Home places a tariff of t = 2 on each unit of imports.

• What is tariff-ridden Home import demand (in terms of Foreign price)?
Recall H import demand curve:


E X P O RT T
What is the tariff-ridden Foreign price?
(as F supply export curve )


What is the tariff-ridden Home price?
=?
 What is the tariff-ridden volume of Home imports? =?

 What is the tariff-ridden volume of Foreign exports? =?

E X P O RT T
• What is tariff-ridden Home quantity demanded?

Home demand curve  QD=?
• What is tariff-ridden Home quantity supplied?

Home supply curve  QS=?
• These numbers appear on the home graph.

E X P O RT T

1. BASIS TARIFF ANALYSIS: MEASURING AMOUNT OF
PROTECTION
E X P O RT T
Effective Rate of Protection

• The effective rate of protection measures how much protection a tariff
(or other trade policy) provides.
– It represents the change in value that firms in an industry add to the
production process when trade policy changes, which depends on the change
in prices the trade policy causes.
• Effective rates of protection often differ from tariff rates because tariffs
affect sectors other than the protected sector, causing indirect effects on
the prices and value added for the protected sector.

PROTECTION
E X P O RT T
Expressed as a percentage of the price that

would prevail under free trade
proportional to the value of the
Ad imports
valorem
=> the tariff rate itself should
measure the amount of protection
dividing the tariff by the

Specific price net of the tariff gives us the ad
valorem equivalent.
PROTECTION
E X P O RT T
There are two problems with trying to calculate the rate of protection this
simply.
- If it’s not a small country (hard to measure), part of the effect of a tariff will
be to lower foreign export prices rather than to raise domestic prices.
- Tariffs may have very different effects on different stages of production of a
good.

PROTECTION
E X P O RT T
1st country:
• To encourage a domestic assembly industry, the 1st

$8,000
country: 25% tariff on imported autos => allow domestic
assembler to charge $10,000 instead of $8,000.
• Before tariff, domestic assembly would take place only if
2 countries: it costs …
• With tariff, it will take place even if it costs …
=> The 25 percent tariff rate provides assemblers with an
effective rate of protection of 100%.
$8,000 $6,000
PROTECTION
E X P O RT T
• To encourage domestic production of parts, imposes a 10 %

tariff on imported parts, raising the cost of parts of
2nd country:
domestic assemblers from $6,000 to $6,600.
• Before tariff: worth assembling a car locally if it could be
done for $2,000 (8k-6k)
• With tariff, local assembly takes place only if it can be done
$8,000 $6,000 for $1,400 (8k-6.6k)
=> Tariff provides positive protection to part manufacturers,
however, provides negative effective protection to assembly at
the rate of -30%
2. COSTS AND BENEFITS OF A TARIFF
E X P O RT T This dress must worth $50. I
earned 20$ indeed!
To measure cost of benefits of a
tariff, we consider customer and
$30
producer surplus.
Consumer surplus (CS):
I would sell it at least
difference between the price a $18. I earned $12!
customer actually pays & the
price he would have been
willing to pay
Producer surplus (PS):
difference between the price a
producer is willing to sell & the
price he receives

E X P O RT T
100
CS =
PS =
50 Total surplus = $2500
50

2.1 PERFECT FREE
I M P O RT -
TRADE WORLD – EFFECT ON IMPORT COUNTRY (SMALL)
MANAGEMEN
E X P O RT T
Home country with domestic production: Finland producing small

quantity of mango
Suppose an ideal perfect free trade world exists: world supply is infinite
elastic  world can supply at any price, Home import demand doesn’t
affect world supply.
Mango
exporters
 India
 China
 Indonesia
 Mexico
 Thailand
…
2.1 PERFECT FREE TRADE WORLD – EFFECT ON IMPORT COUNTRY (SMALL)
E X P O RT T
Same situation happens for “small” country. When a country is “small,” it

has no effect on the foreign (world) price because its demand is an
insignificant part of world demand for the good.
– The foreign price does not fall, but remains at Pw .

– The price in the home market rises by the full amount of the tariff, to PT = Pw
+t

2.1 PERFECT FREE TRADE WORLD – EFFECT ON IMPORT COUNTRY (SMALL)
E X P O RT T
• Tariff raises the price received by domestic $

producers (price of both imported product 70
& domestically produced product) 

protect domestic producers from import
competition
30
• Customer surplus reduces. Imported
quantity reduces.
20
• Producer surplus increases
• Revenue from tariff taken by the Gov. 5
Pc.
• Deadweight loss: loss of social welfare 20 40 60 80

2.2 TWO-COUNTRY MODEL
E X P O RT T
Remind: Trading between 2 countries:

Home & Foreign (H&F). Home country is
relatively a large country  its tariff policy
can somehow impacts foreign export price,
making it reduce  Increase in Home price
is less than the tariff.
Tariff creates a gap between prices in 2
markets: raises H price to and lowers F
price to
Traded volume reduces from to

2.2 TWO-COUNTRY
I M P O RT -
MODEL
MANAGEMEN
E X P O RT T
A tariff raises the price in the

importing country:
– consumer surplus decreases
(consumers worse off)
– producer surplus increases
(producers better off).
– the government collects tariff
revenue equal to the tariff
rate times the quantity of imports
with the tariff.
t Q_import = (PT – PT* ) (D2 – S2)
• Change in welfare due to the tariff

is e – (b + d) (gain – loss)

2.2 TWO-COUNTRY
I M P O RT -
MODEL
MANAGEMEN
E X P O RT T
• The triangles b and d

represent the efficiency Production Consumption
loss. distortion loss distortion loss
– The tariff distorts production
and consumption decisions:
producers produce too much and
consumers consume too little.
• The rectangle e represents

the terms of trade gain.
– The tariff lowers the Foreign
price, allowing Home to buy its
imports cheaper.

2.2 TWO-COUNTRY
I M P O RT -
MODEL
MANAGEMEN
E X P O RT T
 If the country cannot affect world prices (“small country” case)  region e (gain)
disappears  tariff reduces wealth fare.
 Part of government revenue (rectangle e) represents the terms of trade gain, and
part (rectangle c) represents some of the loss in consumer surplus.
– The government gains at the expense of consumers
 If the terms of trade gain exceed the efficiency loss, then national welfare will
increase under a tariff, at the expense of foreign countries.
– However, foreign countries would do a revenge  Trade war

E X P O RT T

3. OTHER INSTRUMENTS OF TRADE POLICY: EXPORT SUBSIDY
E X P O RT T
An export subsidy can also be specific or ad valorem:

– A specific subsidy is a payment per unit exported.
– An ad valorem subsidy is a payment as a proportion of the value exported.
• An export subsidy raises the price in the exporting country, decreasing its
consumer surplus (consumers worse off) and increasing its producer surplus
(producers better off).
• Also, government revenue falls due to paying s XS* for the export subsidy.

E X P O RT T
An export subsidy lowers

the price paid in
importing countries PS* =
PS – s.
• In contrast to a tariff, an
export subsidy worsens
the terms of trade by
lowering the price of
exports in world markets.

E X P O RT T
An export subsidy damages national welfare.
• The triangles b and d represent the efficiency loss.

– The export subsidy distorts production and consumption decisions: producers
produce too much and consumers consume too little compared to the market
outcome.
• The area b + c + d + f + g represents the cost of the subsidy paid by the

government.
– The terms of trade decrease, because the price of exports falls.

3. OTHER INSTRUMENTS OF TRADE POLICY: IMPORT QUOTA
E X P O RT T
An import quota is a restriction on the quantity of a good that may be

imported.
– This restriction is usually enforced by issuing licenses or quota rights.
– A binding import quota will push up the price of the import because the
quantity demanded will exceed the quantity supplied by Home producers
and from imports.
When a quota instead of a tariff is used to restrict imports, the government

receives no revenue.
– Instead, the revenue from selling imports at high prices goes to quota license
holders.
– These extra revenues are called quota rents.

3. OTHER INSTRUMENTS OF TRADE POLICY: IMPORT QUOTA
E X P O RT T
Effects of Import quota

This produces a gain for producers, but
a much larger loss for consumers.
There is no offsetting gain in revenue
because the quota rents are collected
by foreign governments.
Net loss = -(a + b + c + d) + a

= -(b + c + d)

3. OTHER INSTRUMENTS OF TRADE POLICY: VOLUNTARY EXPORT RESTRAINT
E X P O RT T
A voluntary export restraint works like an import quota, except that the quota is
imposed by the exporting country rather than the importing country.
• These restraints are usually requested by the importing country.
• The profits or rents from this policy are earned by foreign governments or foreign
producers.
– Foreigners sell a restricted quantity at an increased price.

3. OTHER INSTRUMENTS OF TRADE POLICY
E X P O RT T
Local Content Requirement

• A local content requirement is a regulation that requires a specified fraction of
a final good to be produced domestically.
Local content requirements benefit domestic producers and jobs, but
consumers face higher prices
• From the viewpoint of domestic producers of inputs, a local content

requirement provides protection in the same way that an import quota would.
• From the viewpoint of firms that must buy home inputs, however, the
requirement does not place a strict limit on imports, but allows firms to import
more if they also use more home parts.

E X P O RT T
Dumping
Administrative Policies Antidumping polices
Administrative trade polices are bureaucratic rules that are designed to make it
difficult for imports to enter a country
These polices hurt consumers by denying access to possibly superior foreign products
Dumping is selling goods in a foreign market below their cost of production, or selling
goods in a foreign market at below their “fair” market value
- It can be a way for firms to unload excess production in foreign markets
- Some dumping may be predatory behavior to drive indigenous competitors out of
that market, and later raising prices and earning substantial profits

E X P O RT T
Antidumping polices are designed to punish foreign firms that engage in dumping.
The goal is to protect domestic producers from “unfair” foreign competition.
U.S. firms that believe a foreign firm is dumping can file a complaint with the
government. If the complaint has merit, antidumping duties, also known as
countervailing duties may be imposed.

E X P O RT T
Question: Why do governments intervene in trade?
Political arguments
• protecting the interests of certain groups within a nation (normally producers),
often at the expense of other groups (normally consumers)
Economic arguments
• boosting the overall wealth of a nation (to the benefit of all, both producers and
consumers)

APPENDIX
LET’S CALL IT A DAY!

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IMPORT - EXPORT MANAGEMENT M.Sc.

1. Basis Tariff Analysis

2. Cost and Benefits of a tariff

3. Other instruments of trade policy

M.Sc. Uyen NGO School of Industrial Engineering and Management 2

• Free trade refers to a situation where a government does not attempt to

Question: How do governments intervene in

M.Sc. Uyen NGO School of Industrial Engineering and Management 3

By using instruments of trade policy:

M.Sc. Uyen NGO School of Industrial Engineering and Management 4

• A tariff is a tax levied on imports that effectively raises the cost of

• Ad valorem tariffs are levied as a proportion of the value of the

M.Sc. Uyen NGO School of Industrial Engineering and Management 5

Question: Why do governments impose tariffs?

M.Sc. Uyen NGO School of Industrial Engineering and Management 6

• Determine tariff: + Business category (Export processing enterprise,

M.Sc. Uyen NGO School of Industrial Engineering and Management 7

EX: a company in Vietnam imports dishwasher of household types (HS

Export country Free trade agreement Import tariff

• Free Trade Agreement (FTA): multinational agreement to form a free-

FTA Trade partners

M.Sc. Uyen NGO School of Industrial Engineering and Management 9

Consider how a tariff affects a single market, say that of wheat.

 declines, increases until difference in prices is eliminated.

M.Sc. Uyen NGO School of Industrial Engineering and Management 10

Import demand = Home demand – Home supply

M.Sc. Uyen NGO School of Industrial Engineering and Management 11

EXAMPLE: Home demand

M.Sc. Uyen NGO School of Industrial Engineering and Management 12

M.Sc. Uyen NGO School of Industrial Engineering and Management 13

Suppose Foreign has demand P* = 12 – Q* and supply P* = Q*.

What is Foreign autarkic price? What is Foreign export supply curve?

12 -QA* = QA* → QA* = 6 P* = 12 − Q*  = 12 − P*

M.Sc. Uyen NGO School of Industrial Engineering and Management 14

import demand = export supply

 home demand – home supply

 home demand + foreign demand

world demand = world supply

M.Sc. Uyen NGO School of Industrial Engineering and Management 15

EXAMPLE: WORLD EQUILIBRIUM

What is the world price under free trade?

• What are Home imports at this price?

• What are Foreign exports at this price?

M.Sc. Uyen NGO School of Industrial Engineering and Management 16

At this price in each country:

How to come up with these results?

M.Sc. Uyen NGO School of Industrial Engineering and Management 17

M.Sc. Uyen NGO School of Industrial Engineering and Management 18

M.Sc. Uyen NGO School of Industrial Engineering and Management 19

If no wheat is being shipped, excess demand in H & excess supply in F price

- Without tariff, price in H =

=> The volume of wheat

M.Sc. Uyen NGO School of Industrial Engineering and Management 21

The quantity of Home imports demanded equals the quantity of Foreign

M.Sc. Uyen NGO School of Industrial Engineering and Management 22

– The foreign price does not fall, but remains at Pw

Þ Production of the imported goods :

Þ Imports fall in the country imposing the tariff.

Tariff on small country

Example: Tariff for a Large Country

Suppose Home places a tariff of t = 2 on each unit of imports.

Recall H import demand curve:

M.Sc. Uyen NGO School of Industrial Engineering and Management 24