Chapter 7

1. Chapter 7 Tariff

2. Tax on good as it enters country Focus of many early trade agreements Easiest distortion to observe Tariff Tariff Barrier •  Oldest form of protection. •  Good for the Government. • Good for producers. • Leads to inefficiency. •  Bad for consumers.

3. Tariff Barrier • Some Conceptions • Characteristics of Tariff • Classify • Customs tariff & procedures • Welfare Effects of Tariff • ERP (Effective Rate of Protection) • Optimal Tariff

4. Some Conceptions • Tariff: Tax on the export or import goods when they enter the custom. • Custom: • Administration organizations • Functions

5. Custom Frontier Free trade zone, bonded warehouse Some Conceptions • Custom and Frontier • Review • Relations • Normal: Custom=Frontier • Custom (+Free trade zone, etc)=Frontier • Custom＞Frontier (Custom Union)

6. Characteristics of Tariff • Tariff is indirect tax • Indirect tax: impose on goods and service; tax burden can be transferred to buyers by raising the price. • Direct tax: impose on property and income, born by tax-payer himself.

7. Characteristics of Tariff • Subjective and objective • Subjective: tax-payers, i.e. exporters & importers; • Objective: goods for exportation or importation. • An important instrument of trade policy

8. Classify • According to taxation object • According to aims of taxation • According to discriminative treatment • According to practice of imposing taxes

9. Taxation object • Import duties: impose on importation goods • General tariff • MFNT tariff • Export duties: impose on exportation goods • Seldom collect, or else harm the international competitiveness, except for making sure of the domestic supply. • Transit Duties

10. Conception of MFNT • The MFN principle requires a signatory (member) country to extend to all other contracting parties any advantage, favor, privilege and immunity affecting trade charges that it grants to another contracting party. • It is complemented by the national treatment rule (NTR)which requires a member country to treat its own and foreign products, services or nationalsequally.

11. Aims of taxation • Providing revenues for government budget——Revenue Tariff • Large consumptions • Not necessity for life or production • Appropriate, not too high • Protecting an industry from imports——Protective Tariff • Protect industry (developing countries) • Protect agriculture (developed countries)

12. discriminative treatment • Import Surtaxes • Purposes • Payment balance crisis • Prevent dumping • Retaliation • Classify • Anti-dumping Duty • Countervailing Duty

13. discriminative treatment • Variable Levy • Condition: domestic price>import price • Means • Direct imposition • Plus on normal tariffimport surtax

14. discriminative treatment • Preferential Duties • low tariff or exemptions for import goods from certain countries or regions • Generalized System of Preference (GSP) • Developed countriesDeveloping countries

15. Practice of imposing taxes • Types • Specific Duty: Fixed charge per unit • The shortcoming of Specific Tariff • The higher the price, the lower the protection • The higher the inflation rate, the lower the protection

16. Practice of imposing taxes • Ad Valorem Duty: Charge is a proportion of the goods value • How to set Duty Paying Value • C.I.F (cost+Insurance+freight) • F.O.B (Free On Board) • Legal price • Mixed or Compound Tariff • Example: In Japan, import watch under 6000 Yen is imposed 15% of ad valorem duty and 150 Yen of specific duty. • Alternative Duty

17. Customs tariff & procedures • Customs Tariff • Conception • Contents • Classify • Single Tariff & Complex Tariff • Autonomous Tariff & Conventional Tariff • Procedures • Process • Documents

18. Welfare Effects of Tariff • Preparation knowledge • Partial equilibrium analysis • Effects on small countries • Effects on big countries • General equilibrium analysis • Effects on small countries • Effects on big countries • Summary

19. Consumer surplus is equal to the area under the demand cure and above the price Consumer Surplus

20. Producer Surplus Producer surplus is equal to the area above the supply curve and below the price

21. a c d b Partial equilibrium analysis: Effects on small countries

22. Effects on small countries • Price effect • Trade effect • the tariff causes imports to fall • Consumption effect • domestic consumers reduce their consumption • Consumer surplus: -(a+b+c+d)

23. Effects on small countries • Production effect • higher prices make it profitable for domestic producers to increase their output • thus the tariff attracts resources into the protected industry from other sectors of the economy • Producer surplus: a • Redistribution effect • the tariff redistributes income from consumers to producers

24. Effects on small countries • Government revenue effect • after the imposition of the tariff, the government collects a certain amount of money • Tariff revenue: c • Net effect for economy • Gross welfare: -(b+d) • worse off

25. Deadweight loss • b——production distortion loss • Resulting from the fact that the tariff leads domestic producers to produce too much of this goods • d——consumer distortion loss • Resulting from the fact that the tariff leads domestic consumers to consume too little of this goods

26. b+d c Effects on world market

27. S+F+T S+F Partial equilibrium analysis: Effects on big countries

28. Effects on big countries • Tariff ——price higher——demand drop——world price drop(PW-PT*) • Consumer surplus: -(a+b+c+d) • Producer surplus: a • Tariff revenue: c+e • Gross welfare: e-(b+d) • uncertain

29. Effects on world market P Sx b+d Px c Pw e P’w Dm M M’ Q

30. slope=-P*X/P* Y General equilibrium analysis: Effects on small countries Small countries’ equilibrium under free trade

31. Effects on small countries Small countries’ equilibrium with tariff slope=-P*X/P* Y(1+t)

32. Effects on Big Countries (TOT) (PX/PY)E' X' X Y (PX/PY)E Y Y2 By imposing a tariff, Big Country decreases trade volume, and improves its terms of trade (but trade partner’s terms of trade deteriorate) X2 X

33. Summary • Tariff effects: • Decline in consumption • Increase domestic production • Decline in imports • Tariff Revenue • Gross Welfare • Small countries: worse off • Big countries: uncertain • Other dynamic effects

34. ERP (Effective Rate of Protection) • Conception • Formula • Example • Summary

35. Conception • ERP define the amount of protection provided to the individual products by the tariff structure of a country.。 • ERP = % increase in an industry’s VALUE ADDED per unit of output that results from the country’s tariff structure.

36. ERP= Formula is the value added per unit of output under free trade; is the value added per unit of output with tariff or non-tariff barriers’ protections.

37. Formula Production costs：a1P+a2P+‥+anP=P∑ai V=P- P∑ai V’=P(1+t)-P ∑ai(1+ti )

38. (1) , g=t; (2) When a1 and t1 are given, the larger t is, the larger g is; (3) <t, g>t t1 =t, g=t >t, g<t (4) When ,g<0 Formula • Suppose i=1

39. V’=5000$ Impose 50％ tariff for whole vehicle V=2000$ Input Costs： 8000$ ＋ 2000$ tariff 15,000$ 10,000$ Input Costs: 8000$ 10,000$ Impose 25％ tariff for input Example: t1<tg>t ERP for Vehicle Industry＝ (V’-V)/V=(5000-2000) /2000 =150%

40. Example: t1>tg<t V’=1000$ Impose 50％ tariff for whole vehicle V=2000$ Input Costs： 8000$ ＋ 6000$ tariff 15,000$ 10,000$ Input Costs: 8000$ 14,000$ Impose 75％ tariff for input ERP for Vehicle Industry＝ (V’-V)/V=(1000-2000) /2000 = -50%

41. Summary • Conclusions: • If the tariff imposed on raw materials or inputs is lower than that on final product, the ERP of this industry is higher than the nominal one. • Otherwise, the ERP is lower than the nominal one, even becomes minus. • Assumptions in ERP

42. Optimal Tariff • Definition：tariff which can maximum the welfare of a country. • Graphical presentation • Offer curve • Demand and supply curve

43. Graph: offer curve • If large Country has the power to dictate the price (It is a Monopolist) it will change the price from T to T* because it is on a higher trade indifference curve • The price line rotates T Import A T* Export B

44. b+d a e Graph: demand and supply curve Maximize Gross welfare: e-(b+d)