INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 4
Tariffs
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2
CHAPTER OUTLINE
(1 of 3)
The Tariff Concept
Types of Tariffs
Effective Rate of Protection
Tariff Escalation
Outsourcing & Offshore Assembly Provision
Dodging Import Tariffs: Tariff Avoidance &
Tariff Evasion
Postponing Import Tariffs
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3
CHAPTER OUTLINE
(2 of 3)
Tariff Effects: An Overview
Tariff Welfare Effects: Consumer Surplus &
Producer Surplus
Tariff Welfare Effects: Small-Nation Model
Tariff Welfare Effects: Large-Nation Model
Examples of U.S. Tariffs
How a Tariff Burdens Exporters
Tariffs and the Poor: Regressive Tariffs
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4
CHAPTER OUTLINE
(3 of 3)
Arguments for Trade Restrictions
Would a Tariff Wall Really Protect U.S.
Jobs?
The Political Economy of Protectionism
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5
Tariffs
• Free-Trade argument posits that open markets foster
most efficient use of world resources
• But free trade policies often meet resistance among
companies and workers who face losses in income and jobs
because of import competition
• Policymakers torn between global efficiency and needs of
voting public
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6
The Tariff Concept
(1 of 3)
• Tariff
• A tax (duty) levied on a product when it crosses
national boundaries
• Import tariff
• Tax levied on an imported product
• Most common; collected before shipment can be unloaded in
domestic port
• Export tariff
• Tax imposed on an exported product
• Less common; illegal under U.S. Constitution
• Commonly used by developing nations
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7
The Tariff Concept
(2 of 3)
• Protective tariff
• Protects domestic producers from foreign
competition
• Facilitates increase in output of import-competing
producers
• Revenue tariff
• Generates tax revenues by placing tariffs on either
imports or exports
• Now only 1% of total federal revenues in U.S.
• Many developing nations rely on tariffs as major source
of income
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8
The Tariff Concept
(3 of 3) Table 4.1
Taxes on International Trade as a Percentage of Government Revenues,
2013: Selected Countries
Developing Countries
Percentage
Advanced Countries
Percentage
Bahamas
43.2
New Zealand
2.7
Ethopia
29.8
Australia
1.8
Liberia
28.1
Japan
1.7
Bangladesh
26.7
United States
1.2
Grenada
25.4
Switzerland
1.0
Russian Federation
25.8
Norway
0.3
Philippines
19.9
Ireland
0.2
India
14.1
World average
3.8
Source: From World Bank Data at http://data.worldbank.org. See also International Monetary Fund,
Government Finance Statistics, Yearbook, Washington, DC.
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9
Types of Tariffs
(1 of 3)
• Tariffs may be specific, ad valorem, or
compound
• Specific tariff
• Fixed amount of money per physical unit of imported
product (Ex: 15 cents/unit).
• Relatively easy to apply and administer
• Degree of protection varies inversely with changes in
import prices
• Provides domestic producers increased protection
during recession (with falling prices)
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10
Types of Tariffs
(2 of 3)
• Tariffs may be specific, ad valorem, or
compound (cont.)
• Ad valorem tariff
• Primarily used with manufactured goods because can be applied
to products with range of grade variations
• Fixed percentage of the value of imported product (Ex: 15%/unit)
• Maintains constant degree of protection for domestic producers
through the business cycle
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11
Types of Tariffs
(3 of 3)
● Tariffs may be specific, ad valorem, or
compound (cont.)
• Customs valuation: determining value of imported product; is
complex, subject to disagreement
• U.S. traditionally uses free-on-board valuation (FOB)⎯tariff
applied to product’s value as it leaves exporting country
• Europe traditionally uses cost-insurance-freight valuation
(CIF)⎯tariffs levied as percentage of imported commodity’s total
value upon arrival at final destination
• Compound tariff
• Applied to manufactured products composed of
raw materials subject to tariffs
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12
Effective Rate of Protection
(1 of 3)
• Nominal and Effective tariff rates
• Nominal tariff rate: rate published in country’s
tariff schedule
• Applies to value of finished product
• Effective tariff rate: takes into account not only
nominal tariff on finished good but any tariff
applied to imported inputs
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13
Effective Rate of Protection
(2 of 3)
• Effective tariff rate (e) calculated as:
• e = effective rate of protection
• n = nominal tariff rate on final product
• a = ratio of value of the imported input to value of
finished product
• b = nominal tariff rate on imported input
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14
Effective Rate of Protection
(3 of 3)
• If tariff on finished product is less than tariff
on imported input
• Effective rate of protection is less than nominal
tariff (may even be negative)
• Tariff protects domestic suppliers of raw materials
more than domestic manufacturers
• If tariff on finished product exceeds tariff on
imported input
• Effective tariff exceeds nominal tariff
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15
Tariff Escalation
• Processed goods have higher import tariffs
• Raw materials often imported at zero or low tariff
rates; nominal and effective protection increases at
each production stage
Tariff Escalations in Advanced and Developing Countries, 2012
AGRICULTURAL PRODUCTS
Country
Bangladesh
Uganda
Argentina
Brazil
Russia
United States
Japan
World
Primary Products
17.5
17.5
5.7
6.5
6.9
1.0
4.5
12.0
Processed Products
23.0
20.3
11.5
12.1
9.2
2.8
10.9
15.1
INDUSTRIAL PRODUCTS
Primary Products
9.1
4.2
2.9
4.2
5.3
1.3
0.5
5.6
Processed Products
15.4
11.7
9.5
10.7
9.5
2.8
1.9
7.7
Source: From World Bank Data at http://data.worldbank.org.
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16
Outsourcing & Offshore
Assembly Provision
• Outsourcing is key aspect of global economy
• Ex: Electronic components made in the U.S. are shipped to
another country with low labor costs for assembly into TV sets;
assembled sets returned to U.S. for further processing or
packaging & distribution
• Each production stage in country where it incurs least cost
• Offshore-assembly provision (OAP)
• Provides favorable treatment to products assembled abroad from
U.S.-made components
• Incentivizes foreign manufacturers to purchase components from
U.S. sources
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17
Dodging Import Tariffs:
Tariff Avoidance & Tariff Evasion
• Tariff avoidance
• Legal utilization of tariff system to one’s own
advantage
• Tariff evasion
• Evading tariffs by illegal means such as smuggling
imported goods into a country
• Ford strips its wagons to avoid high tariff
• Ex: Ford strips its wagons to avoid high tariff
• Ex: Smuggled steel evades U.S. tariffs
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18
Postponing Import Tariffs:
Bonded Warehouse
• Under U.S. tariff law, dutiable imports can be brought into
U.S. and temporarily left in a bonded warehouse, duty free
(up to 5 years)
• Owners of warehouses must be bonded to ensure they will
satisfy all customs duty obligations
• Bonding company guarantees payment of custom duties if
importing company unable to do so
• When goods removed from warehouse, firm must pay
duty on value at time of removal
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19
Foreign-Trade Zone (FMZ)
• Area in U.S. where businesses operate without paying
duties on imported products or materials as long as they
remain in area and do not enter U.S. marketplace
• In an FTZ, can do just about anything to merchandise –
repair, repackage, assemble
• FTZ program treats a product manufactured in FTZ as if it
were imported, not made in U.S.
• Customs duties are due when goods are transferred from
FTZ for U.S. consumption
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20
Tariff Effects: An Overview
• As taxes on imports, tariffs make items more
expensive for consumers, reducing demand
• Buyers pay more for U.S.-made goods than they would
for imported goods under free trade
• Job loss in retail and transportation sectors that import
foreign-made goods
• Job loss in any domestic industry that suffers
retaliatory tariffs
• Additional costs of imported inputs passed on to
consumers through goods and services that use such
inputs in production process
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21
Tariff Welfare Effects: Consumer Surplus
& Producer Surplus (1 of 2)
• Consumer Surplus (CS)
• Difference between what buyers are willing & able to pay
and the amount they actually pay
• Inverse relationship between change in market price and
CS
• Producer surplus (PS)
• Difference between what producers are willing and able to
receive and the amount they actually receive
• Direct relationship between change in price and PS
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22
Tariff Welfare Effects: Consumer Surplus
& Producer Surplus (2 of 2) Figure 4.1
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23
Tariff Welfare Effects:
Small-Nation Model (1 of 4)
• Small nations import very small portion of
world market supply; unable to impact market
price
• Is a price taker, facing constant world prices for
products it imports
• Tariff effects
• Raises home price of imported good by full amount of
duty
• Results in higher domestic production & PS
• Lowers domestic consumption & decreases CS
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24
Tariff Welfare Effects:
Small-Nation Model (2 of 4) Figure 4.2
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25
Tariff Welfare Effects:
Small-Nation Model (3 of 4)
• A small nation tariff effects on nation’s
welfare:
• Consumer surplus falls
• Additional tax revenues
• Benefits domestic producers
• Wastes resources
• Revenue effect (Area “c”)
• Government’s collections of duty
• Redistributive effect (Area “a”)
• Transfer of consumer surplus to domestic producers
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26
Tariff Welfare Effects:
Small-Nation Model (4 of 4)
• A small nation tariff effects on nation’s
welfare: (cont.)
• Protective effect (Area “b”)
• Loss to domestic economy from wasted resources used to
produce at increasing unit costs
• Consumption effect (Area “d”)
• Decrease in consumption resulting from tariff’s artificially
increasing price
• Deadweight loss (Area “b” + “d”)
• Protective effect and consumption combined
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27
Tariff Welfare Effects:
Large-Nation Model (1 of 3)
• Tariffs may increase national welfare when imposed by
importing nation large enough that changes in its quantity
of imports influence world price (ex: U.S., Japan, EU)
• U.S. imposes tariff on automobile imports
• Prices increase for American consumers, quantity demanded
decreases
• Effect shared between U.S. consumers, who pay higher price, and
Japanese firms, which receive lower price than under free trade
• Terms of trade improve for U.S. at Japan’s expense
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28
Tariff Welfare Effects:
Large-Nation Model (2 of 3) Figure 4.3
If e > (b + d)
National welfare is
increased
If e = (b + d)
National welfare remains
constant
If e < (b + d)
National welfare is
diminished
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29
Tariff Welfare Effects:
Large-Nation Model (3 of 3)
• Economic effects of an import tariff
• Redistributive effect
• From domestic consumers to domestic producers
• Deadweight loss
• Consumption effect
• Protective effect
• Revenue effect
• Domestic revenue effect
• Terms-of-trade effect
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30
Donald Trump’s “Border Tax”
How to Pay for the Wall
• Trump wants Mexico to pay for the border
wall
• Mexico refused
• Trump declared a 20 percent border tax on
Mexican imports
• Violated NAFTA and WTO agreements
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31
The Optimum Tariff
& Retaliation
• Optimum tariff
• Maximizes positive difference between gain of
improving terms of trade (Area “e”) and loss in
economic efficiency from the protective effect
(Area “b”) and consumption effect (Area “d”)
• Only beneficial to importing nation
• Beggar-thy-neighbor policy; could invite
retaliation
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32
Examples of U.S. Tariffs (1 of 3)
• Obama’s Tariffs on Chinese Tires
• As condition of entry to WTO in 2001, China agreed that
other nations could clamp down on surges of imports
from China without having to prove unfair trade practices
• In 2004–2008, China increased tire shipments to U.S. by
300%; four U.S. tire plants closed, 4,500 jobs lost; Obama
imposed tariffs for 3 more years
• Obama administration maintained tariffs would enforce
rule China agreed to; significantly reduce tire imports;
boost U.S. sales, prices, profitability; and have little or no
impact on production
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33
Examples of U.S. Tariffs (2 of 3)
• Obama’s Tariffs on Chinese Tires
• Critics argued
• Action opposed by U.S. tire firms because already had
abandoned making low-cost tires
• Not profitable to produce cheap tires in U.S. because of
competition from foreign companies
• To compete, U.S. manufacturers would have to revamp
factory lines to produce tires
• If Chinese tires blocked, Brazil, Indonesia, others will supply,
but will take time; in meantime, will be shortages of low
cost tires in U.S. & prices rising by 20–30%
• Tariff produced mixed results
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34
Examples of U.S. Tariffs (3 of 3)
• Should Footwear Tariffs be Given the Boot?
• During 1930s, tariffs introduced to protect rubber &
canvas shoe industry
• Although other tariffs eliminated since 1930s, footwear
tariffs have continued
• U.S. footwear industry now nearly extinct; almost 99% of
footwear sold in U.S. imported
• Affordable Footwear Act introduced in 2013
• Attempts to abolish most severe footwear tariffs and lower prices
of shoes
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35
How a Tariff Burdens Exporters
• Effects of import tariffs on exporters
• Higher production costs from imported inputs and
reduction in CS
• Can result in higher prices and, depending on elasticity
of demand, reduce overseas sales
• Raise cost of living
• International repercussions lead to reduction in
domestic exports
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36
Tariffs and the Poor:
Regressive Tariffs (1 of 2)
• Tariffs are inequitable
• Impose most severe costs on low-income families
– tend to be regressive
• Higher tariffs imposed on cheap goods than on
luxuries
• Affect different countries in different ways
• Tend to burden countries (e.g., poor countries in Asia
and Middle East) that specialize in production and sale
of cheaper goods
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37
Tariffs and the Poor:
Regressive Tariffs (2 of 2) Table 4.7
U.S. Tariffs Are High on Cheap Goods, Low on Luxuries
Product
Tariff Rate (percent)
Men’s knitted shirts
Synthetic fiber
32.5
Cotton
20.0
Silk
1.9
Handbags
Plastic-sided
16.8
Leather, under $20
10.0
Reptile leather
5.3
Source: From U.S. International Trade Commission, Tariff Schedules of the United States, Washington, DC,
Government Printing Office, 2013, available at http://www.usitc.gov/taffairs.htm.
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38
Arguments for Trade
Restrictions (1 of 9)
• Free-trade argument
• If each nation produces what it does best and
permits trade, in long term, there will be lower
prices and higher levels of output, income, and
consumption
• Job protection argument
• Job gains less visible than job losses
• Trade restrictions result in job gains for few
industries; job losses are spread out
• Saved jobs costs more than worker’s salary
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39
Arguments for Trade
Restrictions (2 of 9)
• Protection against cheap foreign labor
• Low wages abroad makes it hard for U.S. firms to
compete with firms using cheap foreign labor
• Fails to recognize links among efficiency, wages,
and production costs
• Low wages do not guarantee low costs
• Low-wage nations have competitive advantage
only in goods requiring greater labor and few
other factor inputs
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40
Arguments for Trade
Restrictions (3 of 9) Table 4.9
Hourly Compensation Costs in U.S. Dollars for Production Workers in
Manufacturing, 2015
Country
Hourly Compensation (dollars per hour)
Norway
49.67
Germany
42.42
United States
37.71
United Kingdom
31.44
Japan
23.60
Taiwan
9.51
Mexico
5.90
Philippines
2.16
Source: From The Conference Board, International Comparisons of Hourly Compensation Costs in
Manufacturing, 2015, April 12, 2016, available at www.conference-board.org.
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41
Arguments for Trade
Restrictions (4 of 9) Table 4.10
Productivity, Wages, and Unit Labor Costs, Relative to the United States: Total Manufacturing
(United States = 1.0)
Labor Productivity
Relative to United States
Wages Relative to
United States*
Unit Labor Cost Relative
to United States
Hong Kong (2008)
0.21
0.44
2.09
Mauritius (2007)
0.06
0.12
2.00
South Africa (2008)
0.14
0.27
1.93
European Union (2009)
0.46
0.84
1.83
United Kingdom (2009)
0.50
0.84
1.68
U.S. More Competitive
Singapore (2008)
0.40
0.61
1.53
U.S. Less Competitive
Japan (2008)
0.67
0.72
1.07
Mexico (2009)
0.18
0.17
0.94
South Korea (2006)
0.71
0.61
0.86
Poland (2006)
0.26
0.20
0.77
China (2008)
0.12
0.08
0.67
Country
*At market exchange rate.
Source: The author wishes to thank Professor Steven Golub of Swarthmore College, who provided data for this table. Refer to his CESifo Working Paper at the Center
for Economic Studies, University of Munich, Munich, Germany, 2011. See also Janet Ceglowski and Stephen Golub, “Are China’s Labor Costs Still
Low?” This paper was prepared for the CESifo conference on China and the Global Economy Post Crisis, held in Venice, Italy, July 18–19, 2011.
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42
Arguments for Trade
Restrictions (5 of 9)
• Fairness in Trade: Level Playing Field
• Domestic producers say import restrictions need
to offset foreign advantages, to create level
playing field
• Rationale for restrictions is that foreign governments
play by different rules, giving foreign firms unfair
competitive advantage
• Trade benefits domestic economy even if foreign
nations impose trade restrictions
• Fair trade argument overlooks potential impact of
trade restrictions on global trade
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43
Arguments for Trade
Restrictions (6 of 9)
• Maintenance of the Domestic Standard of
Living
• Advocates of trade barriers often contend tariffs
are useful in maintaining high level of income and
employment in home nation
• However, one nation imposes a tariff that improves its
income and employment at the expense of its trading
partner’s living standard (beggar-thy-neighbor policy)
• May spark retaliatory tariffs, resulting in lower level of
welfare for all nations
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44
Arguments for Trade
Restrictions (7 of 9)
• Equalization of Production Costs
• Scientific tariff – to eliminate unfair competition
from abroad
• Problems
• Different costs across business
• Higher domestic prices
• Benefit efficient domestic companies
• Domestic consumer subsidizing inefficient production
• Scientific tariff approximates prohibitive tariff
• Completely contradicts notion of comparative
advantage & eliminates basis/gains for/from trade
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45
Arguments for Trade
Restrictions (8 of 9)
• Infant-Industry Argument
• Trading nations temporarily shield newly developing
industries from foreign competition
• If protective tariff imposed, difficult to remove
• Special-interest groups – convince policy makers that
further protection is justified
• Difficult to determine which industries will realize
comparative advantage in long-run
• Not valid for mature, industrialized nations
• Alternative=providing domestic industry subsidy
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46
Arguments for Trade
Restrictions (9 of 9)
• Noneconomic Arguments
• National security argument
• Protect essential industries
• What constitutes an “essential” industry?
• Cultural and sociological considerations
• Assumption that national and individual’s welfare
enhanced by tariffs
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47
Would a Tariff Wall Really
Protect U.S. Jobs?
• Trade protectionism political priority in 2016
presidential election
• Tariffs on imported steel tend to have a
positive, direct effect on jobs for American
steel workers, but can have less visible,
indirect effects on others
• Tariff-related gains for Americans is a complex
issue
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48
Political Economy of
Protectionism
• Elected officials formulate policies to maximize votes
and remain in office
• Bias in the political system favors protectionism
• Protection-biased sector
• Import competing producers
• Labor unions – in protected industry
• Suppliers of producers in protected industry
• Established firms in aging industry that could lose their
comparative advantage
• Free-trade-biased sector
• Exporting producers, their workers, and their suppliers
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49
A Supply & Demand View of
Protectionism (1 of 3)
• Though protectionism provides benefits to domestic
producers, society as whole pays costs
• Losses of consumer surplus because of higher prices
• Resulting deadweight losses
• Lost economies of scale as further opportunities are lost
• Loss of incentive for technological development provided by
import competition
• The higher the costs of protection, the less likely a
government is to shield an industry from import
competition
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50
A Supply & Demand View of
Protectionism (2 of 3)
• Supply of protectionism increases, depending
on:
• Political importance of import-competing industry
• Whether domestic firms and workers face large
costs of adjusting to rising import competition
• Public sympathy for a group of domestic
businesses or workers
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51
A Supply & Demand View of
Protectionism (3 of 3)
• Demand for protection rises with:
• Intensification of domestic industry’s comparative
disadvantage
• Higher levels of import penetration
• Concentration of domestic production
• Degree of export dependence
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52
INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
53
Chapter 5
Nontariff Trade
Barriers
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54
CHAPTER OUTLINE
(1 of 2)
Absolute Import Quota
Tariff-Rate Quota: A Two-Tier Tariff
Export Quotas
Domestic Content Requirements
Subsidies
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55
CHAPTER OUTLINE
(2 of 2)
Dumping
Antidumping Regulations
Is Antidumping Law Unfair?
Other Nontariff Trade Barriers
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56
Absolute Import Quota
(1 of 7)
• Nontariff trade barriers
• Policies other than tariffs that restrict international
trade
• Absolute quota
• Physical restriction on quantity of goods imported
during a specific time period
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57
Absolute Import Quota
(2 of 7)
• Import licenses
• Government allocates import licenses to
importers, permitting them to import product
only up to prescribed limit, regardless of
market demand
• Global quota
• Permits specified quantity of goods imported
each year; does not specify from where
product is shipped or who imports
• Plagued by accusations of favoritism
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58
Absolute Import Quota
(3 of 7)
• Selective quota
• Import quota allocated to specific countries
• May lead to domestic monopoly of production
and higher prices
• Quotas may lead to domestic monopoly of
production and higher prices
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59
Absolute Import Quota
(4 of 7) Figure 5.1
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60
Absolute Import Quota
(5 of 7)
• Trade and Welfare Effects
• Price increase
• Decrease in consumer surplus
• Redistributive effect (a)
• Deadweight loss (b + d)
• Protective effect (b)
• Consumption effect (d)
• Revenue effect (c)
• Windfall profits, a.k.a. quota rent
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61
Absolute Import Quota
(6 of 7)
• Quotas versus Tariffs
• When demand is growing, an absolute quota
restricts volume of imports by greater amount
than equivalent import tariff
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62
Absolute Import Quota
(7 of 7) Figure 5.2
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63
Tariff-Rate Quota:
A Two-Tier Tariff (1 of 5)
• Tariff-rate quota
• Two components
• Allows specified number of goods to be imported
at lower tariff rate (within-quota rate)
• Any imports above this level face higher tariff rate
(the over-quota rate)
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64
Tariff-Rate Quota:
A Two-Tier Tariff (2 of 5)
• Administration of tariff-rate quotas
• License on demand allocation
• If demand for licenses is less than quota, system
operates on first come, first serve basis
• If demand exceeds quota, import volume
requested is reduced proportionally among all
applicants
• Allocation may also be based on historical market
share or auctions
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65
Tariff-Rate Quota:
A Two-Tier Tariff (3 of 5)
• WTO requires members to convert all
NTBs to tariffs; during transition, tariff-rate
quotas permitted
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66
Tariff-Rate Quota:
A Two-Tier Tariff (4 of 5)
Examples of U.S. Tariff-Rate Quotas
Product
Within-Quota
Tariff Rate
Import-Quota
Threshold
Over-Quota Tariff
Rate
Peanuts
$0.935/kg
30,393 tons
187.9% ad valorem
Beef
$0.44/kg
634,621 tons
31.1% ad valorem
Milk
$0.32/L
5.7 million L
$0.885/L
Blue cheese
$0.10/kg
2.6 million kg
$2.60/kg
Source: From U.S. International Trade Commission, Harmonized Tariff Schedule of the United States,
Washington, DC, U.S. Government Printing Office, 2017.
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67
Tariff-Rate Quota:
A Two-Tier Tariff (5 of 5)
• Sugar tariffs are bittersweet
• U.S. sugar growers receive government guaranteed
minimum price for sugar, but this attracts imported
sugar
• To prevent imports, U.S. implements tariff-rate
quotas
• U.S. price of sugar almost twice world market price
• Many candy firms that use sugar have left country;
those that remain pass price on to consumers
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68
Export Quotas
(1 of 2)
• Export quotas
• Governments enter as form of voluntary export
restraint agreements
• Moderates intensity of international competition;
tend to be more costly than tariffs
• Identical effect to equivalent import quotas,
except implemented by exporting nation
• In 1980s, 67% of costs to U.S. consumers of
these restraints captured by foreign exporters as
profit
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69
Export Quotas
(2 of 2)
• Japanese Auto Restraints Put Brakes on U.S.
Motorists
• U.S. & Japan agreed to limit Japanese exports for
3 years beginning in 1981; purpose to help U.S.
auto industry
• But large Japanese car makers largely
unaffected; increased prices & earned record
profits
• In 1984, U.S. consumer paid extra $660 per
Japanese auto and $1,300 per U.S. auto
• 44,000 U.S. jobs saved at cost of $100,000/job
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70
Domestic Content Requirements
(1 of 2)
• To limit outsourcing, labor lobbied for
domestic content requirements
• Minimum percentage of a good’s value must
be produced locally to qualify for zero tariff
rates
• Pressure domestic/foreign firms to use
domestic inputs/workers
• Can result in higher input and product prices
and loss of competitiveness
• Subsidized by domestic consumers
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71
Domestic Content Requirements
(2 of 2)
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72
Subsidies
(1 of 4)
• Subsidies
• May take form of outright cash
disbursements, tax concessions, insurance
arrangements, and subsidized loans
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73
Subsidies
(2 of 4)
• Domestic Production Subsidy
• Results in
• Higher output
• Redistributive effects – increase in producer
surplus for more efficient producers
• Deadweight loss – protective effect
• Lower welfare losses than a tariff/quota
• Financed by taxpayers
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74
Subsidies
(3 of 4)
• Export Subsidy
• Whereas domestic production subsidy is
granted to producers of import-competing
goods, an export subsidy goes to producers
of goods to be sold overseas
• For both, net price received by producer equals
price paid by purchaser plus subsidy, and subsidy
revenue redistributed in form of producer surplus
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75
Subsidies
(4 of 4)
• Export Subsidy (cont’d)
• Higher output and prices for exporters
• Higher exports; lower domestic consumption
• Domestic producers gain at expense of
domestic consumers and taxpayers
• Decrease in consumer surplus
• Increase in producer surplus
• Taxpayers bear cost of export subsidy
• Deadweight losses (welfare)
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76
Dumping
(1 of 4)
• Dumping
• A form of international price discrimination
• Occurs when foreign buyers are charged
lower prices than domestic buyers for
identical product
• Also, selling in foreign markets at a price
below cost of production
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77
Dumping
(2 of 4)
• Forms of Dumping
• Sporadic Dumping
• A firm disposes of excess inventories in foreign
markets by selling at price below domestic price
• Predatory Dumping
• Producer temporarily reduces price charged
abroad to drive foreign competitors out of business
• Persistent Dumping
• Goes on indefinitely; to maximize economic profits,
a producer may consistently sell abroad at lower
price than at home
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78
Dumping
(3 of 4)
• International Price Discrimination
• Producer charges more at home with less
competition, and more overseas to compete
• Submarkets’ demand conditions must differ
• Different demand elasticities (home/foreign)
• Firm must be able to separate submarkets
• Prevent arbitrage (resale of goods at higher price)
• Markets – easier to separate internationally
• High transportation costs
• Trade restrictions
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79
Dumping
(4 of 4) Figure 5.5
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80
Antidumping Regulations
(1 of 6)
• Antidumping duty
• Levied when
• U.S. Department of Commerce determines foreign
merchandise being sold at less than fair value
(LTFV); and
• U.S. International Trade Commission (ITC)
determines that LTFV imports are causing or
threatening material injury to domestic industry
• Anti-dumping duties imposed in addition to
the normal tariff
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81
Antidumping Regulations
(2 of 6)
• Margin of dumping
• Amount by which foreign market value
exceeds U.S. price
• Foreign market value – two definitions
• Priced-based definition
• Dumping occurs when foreign firm sells good at
price in U.S. below home price
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82
Antidumping Regulations
(3 of 6)
• Foreign market value
• Cost-based definition (used when pricebased definition cannot be applied)
• Cost of manufacturing merchandise + general
expenses (at least 10% of cost of manufacturing) +
profit on home-market sales (at least 8% of
manufacturing cost + general expense) +
packaging merchandise for shipment to U.S.
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83
Antidumping Regulations
(4 of 6)
• Whirlpool Agitates for Antidumping Tariffs
on Clothes Washers
• 93,000 employees, $21 billion in annual sales,
and 70 manufacturing and technology
research centers throughout the world in
2017.
• In 2011, Whirlpool filed anti-dumping and antisubsidy petitions against Samsung & LG,
which it contended were selling in U.S. at
prices substantially less than fair value
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84
Antidumping Regulations
(5 of 6)
• 2016: Whirlpool filed again
• 2017: U.S. International Trade
Commission approved Whirlpool’s petition
for safeguard protection
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85
Antidumping Regulations
(6 of 6)
• Vaughan-Bassett Furniture Company:
Furniture Dumping from China
• Vaughan-Bassett Furniture and other U.S. furniture
manufactures (over opposition of many U.S. furniture
retailers) filed antidumping complaint against China
• In 2005, U.S. government imposed dumping duties of on
most Chinese furniture shipped to U.S.
• Resulted in decrease in Chinese furniture sold in U.S.
• However, imports from Vietnam, Indonesia, and other
countries filled vacuum
• Returned Vaughan-Bassett Furniture to profitability; is now
largest wood bedroom manufacturer in U.S.
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86
Is Antidumping Law Unfair?
(1 of 4)
• Antidumping laws
• Supporters claim such laws needed to ensure
level playing field by offsetting artificial
sources of competitive advantage
• Critics note that although protected industries
gain, consumers lose more and economy as
whole therefore suffers net loss
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87
Is Antidumping Law Unfair?
(2 of 4)
• Should Average Variable Cost be the Yardstick
for Defining Dumping?
• Economists argue that fair value should be based on
average variable cost rather than average total cost,
especially when domestic economy experiences
temporary downturns in demand
• Under competitive conditions, firms price goods at
average variable cost
• Antidumping laws punish competitive behavior
• U.S. firms selling at home not subject to same rules
© 2019 Cengage. All rights reserved.
88
Is Antidumping Law Unfair?
(3 of 4) Table 5.3
Dumping and Excess Capacity
No Dumping
Dumping
Home sales
100 units @ $300
100 units @ $300
Export sales
0 units @ $300
50 units @ $250
Sales revenue
$30,000
$42,500
Less variable costs of $200 per unit
−20,000
−30,000
$10,000
$12,500
−10,000
−10,000
$0
$2,500
Less total fixed costs of $10,000
Profit
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89
Is Antidumping Law Unfair?
(4 of 4)
• Should Antidumping Law Reflect Currency
Fluctuations?
• Fluctuations in exchange rate can cause a foreign
producer to “dump,” according to legal definition
• Are Antidumping Duties Overused?
• Now, nations small and large bring antidumping
cases, leading to retaliation
• In many cases where imports were determined to
be dumped, they would not have been
questioned under the same countries’ antitrust
laws
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90
Other Nontariff Trade Barriers
(1 of 5)
• Government procurement policies: “Buy
American”
• 1933, Buy American Act
• Requires federal agencies to purchase
materials and products from U.S. suppliers
if prices not “unreasonably” higher than
foreign
• “Domestic product,” must 50% domestic
component content and be USA
manufactured
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91
Other Nontariff Trade Barriers
(2 of 5)
• Government procurement policies (cont.)
• 1933, Buy American Act
• U.S. suppliers of civilian agencies –
preferences over foreign firms
• 6-12% preference margin
• 50% preference margin for Department of
Defense
• Preferences waived if U.S.-produced good
is not available in sufficient quantities or is
not of satisfactory quality
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92
Other Nontariff Trade Barriers
(3 of 5)
• Social Regulations
• Correct a variety of undesirable side effects
markets ignore
• Health, safety, and the environment
• CAFÉ Standards
• Corporate average fuel economy standards
• Passenger cars: 37.8 miles per gallon (2016)
• Light trucks: 28.8 miles per gallon (2016)
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93
Other Nontariff Trade Barriers
(4 of 5)
• Europe Has a Cow over Hormone-Treated
U.S. Beef
• Ban on hormone-treated meat
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94
Other Nontariff Trade Barriers
(5 of 5)
• Sea transport and freight regulations
• U.S. shipping companies serving Japanese ports
complained of highly restrictive system of port
services
• Required to clear every detail of visits with Japan’s
stevedore-company association
• Dockworkers available only 18 hours a day or less
• Made U.S. goods more expensive in Japan
• In 1997, U.S. and Japan, on brink of trade war,
reached agreement to liberalize port services in
Japan
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95
Purchase answer to see full
attachment
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 4
Tariffs
© 2019 Cengage. All rights reserved.
2
CHAPTER OUTLINE
(1 of 3)
The Tariff Concept
Types of Tariffs
Effective Rate of Protection
Tariff Escalation
Outsourcing & Offshore Assembly Provision
Dodging Import Tariffs: Tariff Avoidance &
Tariff Evasion
Postponing Import Tariffs
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3
CHAPTER OUTLINE
(2 of 3)
Tariff Effects: An Overview
Tariff Welfare Effects: Consumer Surplus &
Producer Surplus
Tariff Welfare Effects: Small-Nation Model
Tariff Welfare Effects: Large-Nation Model
Examples of U.S. Tariffs
How a Tariff Burdens Exporters
Tariffs and the Poor: Regressive Tariffs
© 2019 Cengage. All rights reserved.
4
CHAPTER OUTLINE
(3 of 3)
Arguments for Trade Restrictions
Would a Tariff Wall Really Protect U.S.
Jobs?
The Political Economy of Protectionism
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5
Tariffs
• Free-Trade argument posits that open markets foster
most efficient use of world resources
• But free trade policies often meet resistance among
companies and workers who face losses in income and jobs
because of import competition
• Policymakers torn between global efficiency and needs of
voting public
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6
The Tariff Concept
(1 of 3)
• Tariff
• A tax (duty) levied on a product when it crosses
national boundaries
• Import tariff
• Tax levied on an imported product
• Most common; collected before shipment can be unloaded in
domestic port
• Export tariff
• Tax imposed on an exported product
• Less common; illegal under U.S. Constitution
• Commonly used by developing nations
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7
The Tariff Concept
(2 of 3)
• Protective tariff
• Protects domestic producers from foreign
competition
• Facilitates increase in output of import-competing
producers
• Revenue tariff
• Generates tax revenues by placing tariffs on either
imports or exports
• Now only 1% of total federal revenues in U.S.
• Many developing nations rely on tariffs as major source
of income
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8
The Tariff Concept
(3 of 3) Table 4.1
Taxes on International Trade as a Percentage of Government Revenues,
2013: Selected Countries
Developing Countries
Percentage
Advanced Countries
Percentage
Bahamas
43.2
New Zealand
2.7
Ethopia
29.8
Australia
1.8
Liberia
28.1
Japan
1.7
Bangladesh
26.7
United States
1.2
Grenada
25.4
Switzerland
1.0
Russian Federation
25.8
Norway
0.3
Philippines
19.9
Ireland
0.2
India
14.1
World average
3.8
Source: From World Bank Data at http://data.worldbank.org. See also International Monetary Fund,
Government Finance Statistics, Yearbook, Washington, DC.
© 2019 Cengage. All rights reserved.
9
Types of Tariffs
(1 of 3)
• Tariffs may be specific, ad valorem, or
compound
• Specific tariff
• Fixed amount of money per physical unit of imported
product (Ex: 15 cents/unit).
• Relatively easy to apply and administer
• Degree of protection varies inversely with changes in
import prices
• Provides domestic producers increased protection
during recession (with falling prices)
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10
Types of Tariffs
(2 of 3)
• Tariffs may be specific, ad valorem, or
compound (cont.)
• Ad valorem tariff
• Primarily used with manufactured goods because can be applied
to products with range of grade variations
• Fixed percentage of the value of imported product (Ex: 15%/unit)
• Maintains constant degree of protection for domestic producers
through the business cycle
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11
Types of Tariffs
(3 of 3)
● Tariffs may be specific, ad valorem, or
compound (cont.)
• Customs valuation: determining value of imported product; is
complex, subject to disagreement
• U.S. traditionally uses free-on-board valuation (FOB)⎯tariff
applied to product’s value as it leaves exporting country
• Europe traditionally uses cost-insurance-freight valuation
(CIF)⎯tariffs levied as percentage of imported commodity’s total
value upon arrival at final destination
• Compound tariff
• Applied to manufactured products composed of
raw materials subject to tariffs
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12
Effective Rate of Protection
(1 of 3)
• Nominal and Effective tariff rates
• Nominal tariff rate: rate published in country’s
tariff schedule
• Applies to value of finished product
• Effective tariff rate: takes into account not only
nominal tariff on finished good but any tariff
applied to imported inputs
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13
Effective Rate of Protection
(2 of 3)
• Effective tariff rate (e) calculated as:
• e = effective rate of protection
• n = nominal tariff rate on final product
• a = ratio of value of the imported input to value of
finished product
• b = nominal tariff rate on imported input
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14
Effective Rate of Protection
(3 of 3)
• If tariff on finished product is less than tariff
on imported input
• Effective rate of protection is less than nominal
tariff (may even be negative)
• Tariff protects domestic suppliers of raw materials
more than domestic manufacturers
• If tariff on finished product exceeds tariff on
imported input
• Effective tariff exceeds nominal tariff
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15
Tariff Escalation
• Processed goods have higher import tariffs
• Raw materials often imported at zero or low tariff
rates; nominal and effective protection increases at
each production stage
Tariff Escalations in Advanced and Developing Countries, 2012
AGRICULTURAL PRODUCTS
Country
Bangladesh
Uganda
Argentina
Brazil
Russia
United States
Japan
World
Primary Products
17.5
17.5
5.7
6.5
6.9
1.0
4.5
12.0
Processed Products
23.0
20.3
11.5
12.1
9.2
2.8
10.9
15.1
INDUSTRIAL PRODUCTS
Primary Products
9.1
4.2
2.9
4.2
5.3
1.3
0.5
5.6
Processed Products
15.4
11.7
9.5
10.7
9.5
2.8
1.9
7.7
Source: From World Bank Data at http://data.worldbank.org.
© 2019 Cengage. All rights reserved.
16
Outsourcing & Offshore
Assembly Provision
• Outsourcing is key aspect of global economy
• Ex: Electronic components made in the U.S. are shipped to
another country with low labor costs for assembly into TV sets;
assembled sets returned to U.S. for further processing or
packaging & distribution
• Each production stage in country where it incurs least cost
• Offshore-assembly provision (OAP)
• Provides favorable treatment to products assembled abroad from
U.S.-made components
• Incentivizes foreign manufacturers to purchase components from
U.S. sources
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17
Dodging Import Tariffs:
Tariff Avoidance & Tariff Evasion
• Tariff avoidance
• Legal utilization of tariff system to one’s own
advantage
• Tariff evasion
• Evading tariffs by illegal means such as smuggling
imported goods into a country
• Ford strips its wagons to avoid high tariff
• Ex: Ford strips its wagons to avoid high tariff
• Ex: Smuggled steel evades U.S. tariffs
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18
Postponing Import Tariffs:
Bonded Warehouse
• Under U.S. tariff law, dutiable imports can be brought into
U.S. and temporarily left in a bonded warehouse, duty free
(up to 5 years)
• Owners of warehouses must be bonded to ensure they will
satisfy all customs duty obligations
• Bonding company guarantees payment of custom duties if
importing company unable to do so
• When goods removed from warehouse, firm must pay
duty on value at time of removal
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19
Foreign-Trade Zone (FMZ)
• Area in U.S. where businesses operate without paying
duties on imported products or materials as long as they
remain in area and do not enter U.S. marketplace
• In an FTZ, can do just about anything to merchandise –
repair, repackage, assemble
• FTZ program treats a product manufactured in FTZ as if it
were imported, not made in U.S.
• Customs duties are due when goods are transferred from
FTZ for U.S. consumption
© 2019 Cengage. All rights reserved.
20
Tariff Effects: An Overview
• As taxes on imports, tariffs make items more
expensive for consumers, reducing demand
• Buyers pay more for U.S.-made goods than they would
for imported goods under free trade
• Job loss in retail and transportation sectors that import
foreign-made goods
• Job loss in any domestic industry that suffers
retaliatory tariffs
• Additional costs of imported inputs passed on to
consumers through goods and services that use such
inputs in production process
© 2019 Cengage. All rights reserved.
21
Tariff Welfare Effects: Consumer Surplus
& Producer Surplus (1 of 2)
• Consumer Surplus (CS)
• Difference between what buyers are willing & able to pay
and the amount they actually pay
• Inverse relationship between change in market price and
CS
• Producer surplus (PS)
• Difference between what producers are willing and able to
receive and the amount they actually receive
• Direct relationship between change in price and PS
© 2019 Cengage. All rights reserved.
22
Tariff Welfare Effects: Consumer Surplus
& Producer Surplus (2 of 2) Figure 4.1
© 2019 Cengage. All rights reserved.
23
Tariff Welfare Effects:
Small-Nation Model (1 of 4)
• Small nations import very small portion of
world market supply; unable to impact market
price
• Is a price taker, facing constant world prices for
products it imports
• Tariff effects
• Raises home price of imported good by full amount of
duty
• Results in higher domestic production & PS
• Lowers domestic consumption & decreases CS
© 2019 Cengage. All rights reserved.
24
Tariff Welfare Effects:
Small-Nation Model (2 of 4) Figure 4.2
© 2019 Cengage. All rights reserved.
25
Tariff Welfare Effects:
Small-Nation Model (3 of 4)
• A small nation tariff effects on nation’s
welfare:
• Consumer surplus falls
• Additional tax revenues
• Benefits domestic producers
• Wastes resources
• Revenue effect (Area “c”)
• Government’s collections of duty
• Redistributive effect (Area “a”)
• Transfer of consumer surplus to domestic producers
© 2019 Cengage. All rights reserved.
26
Tariff Welfare Effects:
Small-Nation Model (4 of 4)
• A small nation tariff effects on nation’s
welfare: (cont.)
• Protective effect (Area “b”)
• Loss to domestic economy from wasted resources used to
produce at increasing unit costs
• Consumption effect (Area “d”)
• Decrease in consumption resulting from tariff’s artificially
increasing price
• Deadweight loss (Area “b” + “d”)
• Protective effect and consumption combined
© 2019 Cengage. All rights reserved.
27
Tariff Welfare Effects:
Large-Nation Model (1 of 3)
• Tariffs may increase national welfare when imposed by
importing nation large enough that changes in its quantity
of imports influence world price (ex: U.S., Japan, EU)
• U.S. imposes tariff on automobile imports
• Prices increase for American consumers, quantity demanded
decreases
• Effect shared between U.S. consumers, who pay higher price, and
Japanese firms, which receive lower price than under free trade
• Terms of trade improve for U.S. at Japan’s expense
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28
Tariff Welfare Effects:
Large-Nation Model (2 of 3) Figure 4.3
If e > (b + d)
National welfare is
increased
If e = (b + d)
National welfare remains
constant
If e < (b + d)
National welfare is
diminished
© 2019 Cengage. All rights reserved.
29
Tariff Welfare Effects:
Large-Nation Model (3 of 3)
• Economic effects of an import tariff
• Redistributive effect
• From domestic consumers to domestic producers
• Deadweight loss
• Consumption effect
• Protective effect
• Revenue effect
• Domestic revenue effect
• Terms-of-trade effect
© 2019 Cengage. All rights reserved.
30
Donald Trump’s “Border Tax”
How to Pay for the Wall
• Trump wants Mexico to pay for the border
wall
• Mexico refused
• Trump declared a 20 percent border tax on
Mexican imports
• Violated NAFTA and WTO agreements
© 2019 Cengage. All rights reserved.
31
The Optimum Tariff
& Retaliation
• Optimum tariff
• Maximizes positive difference between gain of
improving terms of trade (Area “e”) and loss in
economic efficiency from the protective effect
(Area “b”) and consumption effect (Area “d”)
• Only beneficial to importing nation
• Beggar-thy-neighbor policy; could invite
retaliation
© 2019 Cengage. All rights reserved.
32
Examples of U.S. Tariffs (1 of 3)
• Obama’s Tariffs on Chinese Tires
• As condition of entry to WTO in 2001, China agreed that
other nations could clamp down on surges of imports
from China without having to prove unfair trade practices
• In 2004–2008, China increased tire shipments to U.S. by
300%; four U.S. tire plants closed, 4,500 jobs lost; Obama
imposed tariffs for 3 more years
• Obama administration maintained tariffs would enforce
rule China agreed to; significantly reduce tire imports;
boost U.S. sales, prices, profitability; and have little or no
impact on production
© 2019 Cengage. All rights reserved.
33
Examples of U.S. Tariffs (2 of 3)
• Obama’s Tariffs on Chinese Tires
• Critics argued
• Action opposed by U.S. tire firms because already had
abandoned making low-cost tires
• Not profitable to produce cheap tires in U.S. because of
competition from foreign companies
• To compete, U.S. manufacturers would have to revamp
factory lines to produce tires
• If Chinese tires blocked, Brazil, Indonesia, others will supply,
but will take time; in meantime, will be shortages of low
cost tires in U.S. & prices rising by 20–30%
• Tariff produced mixed results
© 2019 Cengage. All rights reserved.
34
Examples of U.S. Tariffs (3 of 3)
• Should Footwear Tariffs be Given the Boot?
• During 1930s, tariffs introduced to protect rubber &
canvas shoe industry
• Although other tariffs eliminated since 1930s, footwear
tariffs have continued
• U.S. footwear industry now nearly extinct; almost 99% of
footwear sold in U.S. imported
• Affordable Footwear Act introduced in 2013
• Attempts to abolish most severe footwear tariffs and lower prices
of shoes
© 2019 Cengage. All rights reserved.
35
How a Tariff Burdens Exporters
• Effects of import tariffs on exporters
• Higher production costs from imported inputs and
reduction in CS
• Can result in higher prices and, depending on elasticity
of demand, reduce overseas sales
• Raise cost of living
• International repercussions lead to reduction in
domestic exports
© 2019 Cengage. All rights reserved.
36
Tariffs and the Poor:
Regressive Tariffs (1 of 2)
• Tariffs are inequitable
• Impose most severe costs on low-income families
– tend to be regressive
• Higher tariffs imposed on cheap goods than on
luxuries
• Affect different countries in different ways
• Tend to burden countries (e.g., poor countries in Asia
and Middle East) that specialize in production and sale
of cheaper goods
© 2019 Cengage. All rights reserved.
37
Tariffs and the Poor:
Regressive Tariffs (2 of 2) Table 4.7
U.S. Tariffs Are High on Cheap Goods, Low on Luxuries
Product
Tariff Rate (percent)
Men’s knitted shirts
Synthetic fiber
32.5
Cotton
20.0
Silk
1.9
Handbags
Plastic-sided
16.8
Leather, under $20
10.0
Reptile leather
5.3
Source: From U.S. International Trade Commission, Tariff Schedules of the United States, Washington, DC,
Government Printing Office, 2013, available at http://www.usitc.gov/taffairs.htm.
© 2019 Cengage. All rights reserved.
38
Arguments for Trade
Restrictions (1 of 9)
• Free-trade argument
• If each nation produces what it does best and
permits trade, in long term, there will be lower
prices and higher levels of output, income, and
consumption
• Job protection argument
• Job gains less visible than job losses
• Trade restrictions result in job gains for few
industries; job losses are spread out
• Saved jobs costs more than worker’s salary
© 2019 Cengage. All rights reserved.
39
Arguments for Trade
Restrictions (2 of 9)
• Protection against cheap foreign labor
• Low wages abroad makes it hard for U.S. firms to
compete with firms using cheap foreign labor
• Fails to recognize links among efficiency, wages,
and production costs
• Low wages do not guarantee low costs
• Low-wage nations have competitive advantage
only in goods requiring greater labor and few
other factor inputs
© 2019 Cengage. All rights reserved.
40
Arguments for Trade
Restrictions (3 of 9) Table 4.9
Hourly Compensation Costs in U.S. Dollars for Production Workers in
Manufacturing, 2015
Country
Hourly Compensation (dollars per hour)
Norway
49.67
Germany
42.42
United States
37.71
United Kingdom
31.44
Japan
23.60
Taiwan
9.51
Mexico
5.90
Philippines
2.16
Source: From The Conference Board, International Comparisons of Hourly Compensation Costs in
Manufacturing, 2015, April 12, 2016, available at www.conference-board.org.
© 2019 Cengage. All rights reserved.
41
Arguments for Trade
Restrictions (4 of 9) Table 4.10
Productivity, Wages, and Unit Labor Costs, Relative to the United States: Total Manufacturing
(United States = 1.0)
Labor Productivity
Relative to United States
Wages Relative to
United States*
Unit Labor Cost Relative
to United States
Hong Kong (2008)
0.21
0.44
2.09
Mauritius (2007)
0.06
0.12
2.00
South Africa (2008)
0.14
0.27
1.93
European Union (2009)
0.46
0.84
1.83
United Kingdom (2009)
0.50
0.84
1.68
U.S. More Competitive
Singapore (2008)
0.40
0.61
1.53
U.S. Less Competitive
Japan (2008)
0.67
0.72
1.07
Mexico (2009)
0.18
0.17
0.94
South Korea (2006)
0.71
0.61
0.86
Poland (2006)
0.26
0.20
0.77
China (2008)
0.12
0.08
0.67
Country
*At market exchange rate.
Source: The author wishes to thank Professor Steven Golub of Swarthmore College, who provided data for this table. Refer to his CESifo Working Paper at the Center
for Economic Studies, University of Munich, Munich, Germany, 2011. See also Janet Ceglowski and Stephen Golub, “Are China’s Labor Costs Still
Low?” This paper was prepared for the CESifo conference on China and the Global Economy Post Crisis, held in Venice, Italy, July 18–19, 2011.
© 2019 Cengage. All rights reserved.
42
Arguments for Trade
Restrictions (5 of 9)
• Fairness in Trade: Level Playing Field
• Domestic producers say import restrictions need
to offset foreign advantages, to create level
playing field
• Rationale for restrictions is that foreign governments
play by different rules, giving foreign firms unfair
competitive advantage
• Trade benefits domestic economy even if foreign
nations impose trade restrictions
• Fair trade argument overlooks potential impact of
trade restrictions on global trade
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43
Arguments for Trade
Restrictions (6 of 9)
• Maintenance of the Domestic Standard of
Living
• Advocates of trade barriers often contend tariffs
are useful in maintaining high level of income and
employment in home nation
• However, one nation imposes a tariff that improves its
income and employment at the expense of its trading
partner’s living standard (beggar-thy-neighbor policy)
• May spark retaliatory tariffs, resulting in lower level of
welfare for all nations
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44
Arguments for Trade
Restrictions (7 of 9)
• Equalization of Production Costs
• Scientific tariff – to eliminate unfair competition
from abroad
• Problems
• Different costs across business
• Higher domestic prices
• Benefit efficient domestic companies
• Domestic consumer subsidizing inefficient production
• Scientific tariff approximates prohibitive tariff
• Completely contradicts notion of comparative
advantage & eliminates basis/gains for/from trade
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45
Arguments for Trade
Restrictions (8 of 9)
• Infant-Industry Argument
• Trading nations temporarily shield newly developing
industries from foreign competition
• If protective tariff imposed, difficult to remove
• Special-interest groups – convince policy makers that
further protection is justified
• Difficult to determine which industries will realize
comparative advantage in long-run
• Not valid for mature, industrialized nations
• Alternative=providing domestic industry subsidy
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46
Arguments for Trade
Restrictions (9 of 9)
• Noneconomic Arguments
• National security argument
• Protect essential industries
• What constitutes an “essential” industry?
• Cultural and sociological considerations
• Assumption that national and individual’s welfare
enhanced by tariffs
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47
Would a Tariff Wall Really
Protect U.S. Jobs?
• Trade protectionism political priority in 2016
presidential election
• Tariffs on imported steel tend to have a
positive, direct effect on jobs for American
steel workers, but can have less visible,
indirect effects on others
• Tariff-related gains for Americans is a complex
issue
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48
Political Economy of
Protectionism
• Elected officials formulate policies to maximize votes
and remain in office
• Bias in the political system favors protectionism
• Protection-biased sector
• Import competing producers
• Labor unions – in protected industry
• Suppliers of producers in protected industry
• Established firms in aging industry that could lose their
comparative advantage
• Free-trade-biased sector
• Exporting producers, their workers, and their suppliers
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49
A Supply & Demand View of
Protectionism (1 of 3)
• Though protectionism provides benefits to domestic
producers, society as whole pays costs
• Losses of consumer surplus because of higher prices
• Resulting deadweight losses
• Lost economies of scale as further opportunities are lost
• Loss of incentive for technological development provided by
import competition
• The higher the costs of protection, the less likely a
government is to shield an industry from import
competition
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50
A Supply & Demand View of
Protectionism (2 of 3)
• Supply of protectionism increases, depending
on:
• Political importance of import-competing industry
• Whether domestic firms and workers face large
costs of adjusting to rising import competition
• Public sympathy for a group of domestic
businesses or workers
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51
A Supply & Demand View of
Protectionism (3 of 3)
• Demand for protection rises with:
• Intensification of domestic industry’s comparative
disadvantage
• Higher levels of import penetration
• Concentration of domestic production
• Degree of export dependence
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52
INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
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53
Chapter 5
Nontariff Trade
Barriers
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54
CHAPTER OUTLINE
(1 of 2)
Absolute Import Quota
Tariff-Rate Quota: A Two-Tier Tariff
Export Quotas
Domestic Content Requirements
Subsidies
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55
CHAPTER OUTLINE
(2 of 2)
Dumping
Antidumping Regulations
Is Antidumping Law Unfair?
Other Nontariff Trade Barriers
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56
Absolute Import Quota
(1 of 7)
• Nontariff trade barriers
• Policies other than tariffs that restrict international
trade
• Absolute quota
• Physical restriction on quantity of goods imported
during a specific time period
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57
Absolute Import Quota
(2 of 7)
• Import licenses
• Government allocates import licenses to
importers, permitting them to import product
only up to prescribed limit, regardless of
market demand
• Global quota
• Permits specified quantity of goods imported
each year; does not specify from where
product is shipped or who imports
• Plagued by accusations of favoritism
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58
Absolute Import Quota
(3 of 7)
• Selective quota
• Import quota allocated to specific countries
• May lead to domestic monopoly of production
and higher prices
• Quotas may lead to domestic monopoly of
production and higher prices
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59
Absolute Import Quota
(4 of 7) Figure 5.1
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60
Absolute Import Quota
(5 of 7)
• Trade and Welfare Effects
• Price increase
• Decrease in consumer surplus
• Redistributive effect (a)
• Deadweight loss (b + d)
• Protective effect (b)
• Consumption effect (d)
• Revenue effect (c)
• Windfall profits, a.k.a. quota rent
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61
Absolute Import Quota
(6 of 7)
• Quotas versus Tariffs
• When demand is growing, an absolute quota
restricts volume of imports by greater amount
than equivalent import tariff
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62
Absolute Import Quota
(7 of 7) Figure 5.2
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63
Tariff-Rate Quota:
A Two-Tier Tariff (1 of 5)
• Tariff-rate quota
• Two components
• Allows specified number of goods to be imported
at lower tariff rate (within-quota rate)
• Any imports above this level face higher tariff rate
(the over-quota rate)
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64
Tariff-Rate Quota:
A Two-Tier Tariff (2 of 5)
• Administration of tariff-rate quotas
• License on demand allocation
• If demand for licenses is less than quota, system
operates on first come, first serve basis
• If demand exceeds quota, import volume
requested is reduced proportionally among all
applicants
• Allocation may also be based on historical market
share or auctions
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65
Tariff-Rate Quota:
A Two-Tier Tariff (3 of 5)
• WTO requires members to convert all
NTBs to tariffs; during transition, tariff-rate
quotas permitted
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66
Tariff-Rate Quota:
A Two-Tier Tariff (4 of 5)
Examples of U.S. Tariff-Rate Quotas
Product
Within-Quota
Tariff Rate
Import-Quota
Threshold
Over-Quota Tariff
Rate
Peanuts
$0.935/kg
30,393 tons
187.9% ad valorem
Beef
$0.44/kg
634,621 tons
31.1% ad valorem
Milk
$0.32/L
5.7 million L
$0.885/L
Blue cheese
$0.10/kg
2.6 million kg
$2.60/kg
Source: From U.S. International Trade Commission, Harmonized Tariff Schedule of the United States,
Washington, DC, U.S. Government Printing Office, 2017.
© 2019 Cengage. All rights reserved.
67
Tariff-Rate Quota:
A Two-Tier Tariff (5 of 5)
• Sugar tariffs are bittersweet
• U.S. sugar growers receive government guaranteed
minimum price for sugar, but this attracts imported
sugar
• To prevent imports, U.S. implements tariff-rate
quotas
• U.S. price of sugar almost twice world market price
• Many candy firms that use sugar have left country;
those that remain pass price on to consumers
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68
Export Quotas
(1 of 2)
• Export quotas
• Governments enter as form of voluntary export
restraint agreements
• Moderates intensity of international competition;
tend to be more costly than tariffs
• Identical effect to equivalent import quotas,
except implemented by exporting nation
• In 1980s, 67% of costs to U.S. consumers of
these restraints captured by foreign exporters as
profit
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69
Export Quotas
(2 of 2)
• Japanese Auto Restraints Put Brakes on U.S.
Motorists
• U.S. & Japan agreed to limit Japanese exports for
3 years beginning in 1981; purpose to help U.S.
auto industry
• But large Japanese car makers largely
unaffected; increased prices & earned record
profits
• In 1984, U.S. consumer paid extra $660 per
Japanese auto and $1,300 per U.S. auto
• 44,000 U.S. jobs saved at cost of $100,000/job
© 2019 Cengage. All rights reserved.
70
Domestic Content Requirements
(1 of 2)
• To limit outsourcing, labor lobbied for
domestic content requirements
• Minimum percentage of a good’s value must
be produced locally to qualify for zero tariff
rates
• Pressure domestic/foreign firms to use
domestic inputs/workers
• Can result in higher input and product prices
and loss of competitiveness
• Subsidized by domestic consumers
© 2019 Cengage. All rights reserved.
71
Domestic Content Requirements
(2 of 2)
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72
Subsidies
(1 of 4)
• Subsidies
• May take form of outright cash
disbursements, tax concessions, insurance
arrangements, and subsidized loans
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73
Subsidies
(2 of 4)
• Domestic Production Subsidy
• Results in
• Higher output
• Redistributive effects – increase in producer
surplus for more efficient producers
• Deadweight loss – protective effect
• Lower welfare losses than a tariff/quota
• Financed by taxpayers
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74
Subsidies
(3 of 4)
• Export Subsidy
• Whereas domestic production subsidy is
granted to producers of import-competing
goods, an export subsidy goes to producers
of goods to be sold overseas
• For both, net price received by producer equals
price paid by purchaser plus subsidy, and subsidy
revenue redistributed in form of producer surplus
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75
Subsidies
(4 of 4)
• Export Subsidy (cont’d)
• Higher output and prices for exporters
• Higher exports; lower domestic consumption
• Domestic producers gain at expense of
domestic consumers and taxpayers
• Decrease in consumer surplus
• Increase in producer surplus
• Taxpayers bear cost of export subsidy
• Deadweight losses (welfare)
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76
Dumping
(1 of 4)
• Dumping
• A form of international price discrimination
• Occurs when foreign buyers are charged
lower prices than domestic buyers for
identical product
• Also, selling in foreign markets at a price
below cost of production
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77
Dumping
(2 of 4)
• Forms of Dumping
• Sporadic Dumping
• A firm disposes of excess inventories in foreign
markets by selling at price below domestic price
• Predatory Dumping
• Producer temporarily reduces price charged
abroad to drive foreign competitors out of business
• Persistent Dumping
• Goes on indefinitely; to maximize economic profits,
a producer may consistently sell abroad at lower
price than at home
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78
Dumping
(3 of 4)
• International Price Discrimination
• Producer charges more at home with less
competition, and more overseas to compete
• Submarkets’ demand conditions must differ
• Different demand elasticities (home/foreign)
• Firm must be able to separate submarkets
• Prevent arbitrage (resale of goods at higher price)
• Markets – easier to separate internationally
• High transportation costs
• Trade restrictions
© 2019 Cengage. All rights reserved.
79
Dumping
(4 of 4) Figure 5.5
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80
Antidumping Regulations
(1 of 6)
• Antidumping duty
• Levied when
• U.S. Department of Commerce determines foreign
merchandise being sold at less than fair value
(LTFV); and
• U.S. International Trade Commission (ITC)
determines that LTFV imports are causing or
threatening material injury to domestic industry
• Anti-dumping duties imposed in addition to
the normal tariff
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81
Antidumping Regulations
(2 of 6)
• Margin of dumping
• Amount by which foreign market value
exceeds U.S. price
• Foreign market value – two definitions
• Priced-based definition
• Dumping occurs when foreign firm sells good at
price in U.S. below home price
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82
Antidumping Regulations
(3 of 6)
• Foreign market value
• Cost-based definition (used when pricebased definition cannot be applied)
• Cost of manufacturing merchandise + general
expenses (at least 10% of cost of manufacturing) +
profit on home-market sales (at least 8% of
manufacturing cost + general expense) +
packaging merchandise for shipment to U.S.
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83
Antidumping Regulations
(4 of 6)
• Whirlpool Agitates for Antidumping Tariffs
on Clothes Washers
• 93,000 employees, $21 billion in annual sales,
and 70 manufacturing and technology
research centers throughout the world in
2017.
• In 2011, Whirlpool filed anti-dumping and antisubsidy petitions against Samsung & LG,
which it contended were selling in U.S. at
prices substantially less than fair value
© 2019 Cengage. All rights reserved.
84
Antidumping Regulations
(5 of 6)
• 2016: Whirlpool filed again
• 2017: U.S. International Trade
Commission approved Whirlpool’s petition
for safeguard protection
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85
Antidumping Regulations
(6 of 6)
• Vaughan-Bassett Furniture Company:
Furniture Dumping from China
• Vaughan-Bassett Furniture and other U.S. furniture
manufactures (over opposition of many U.S. furniture
retailers) filed antidumping complaint against China
• In 2005, U.S. government imposed dumping duties of on
most Chinese furniture shipped to U.S.
• Resulted in decrease in Chinese furniture sold in U.S.
• However, imports from Vietnam, Indonesia, and other
countries filled vacuum
• Returned Vaughan-Bassett Furniture to profitability; is now
largest wood bedroom manufacturer in U.S.
© 2019 Cengage. All rights reserved.
86
Is Antidumping Law Unfair?
(1 of 4)
• Antidumping laws
• Supporters claim such laws needed to ensure
level playing field by offsetting artificial
sources of competitive advantage
• Critics note that although protected industries
gain, consumers lose more and economy as
whole therefore suffers net loss
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87
Is Antidumping Law Unfair?
(2 of 4)
• Should Average Variable Cost be the Yardstick
for Defining Dumping?
• Economists argue that fair value should be based on
average variable cost rather than average total cost,
especially when domestic economy experiences
temporary downturns in demand
• Under competitive conditions, firms price goods at
average variable cost
• Antidumping laws punish competitive behavior
• U.S. firms selling at home not subject to same rules
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88
Is Antidumping Law Unfair?
(3 of 4) Table 5.3
Dumping and Excess Capacity
No Dumping
Dumping
Home sales
100 units @ $300
100 units @ $300
Export sales
0 units @ $300
50 units @ $250
Sales revenue
$30,000
$42,500
Less variable costs of $200 per unit
−20,000
−30,000
$10,000
$12,500
−10,000
−10,000
$0
$2,500
Less total fixed costs of $10,000
Profit
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89
Is Antidumping Law Unfair?
(4 of 4)
• Should Antidumping Law Reflect Currency
Fluctuations?
• Fluctuations in exchange rate can cause a foreign
producer to “dump,” according to legal definition
• Are Antidumping Duties Overused?
• Now, nations small and large bring antidumping
cases, leading to retaliation
• In many cases where imports were determined to
be dumped, they would not have been
questioned under the same countries’ antitrust
laws
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90
Other Nontariff Trade Barriers
(1 of 5)
• Government procurement policies: “Buy
American”
• 1933, Buy American Act
• Requires federal agencies to purchase
materials and products from U.S. suppliers
if prices not “unreasonably” higher than
foreign
• “Domestic product,” must 50% domestic
component content and be USA
manufactured
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91
Other Nontariff Trade Barriers
(2 of 5)
• Government procurement policies (cont.)
• 1933, Buy American Act
• U.S. suppliers of civilian agencies –
preferences over foreign firms
• 6-12% preference margin
• 50% preference margin for Department of
Defense
• Preferences waived if U.S.-produced good
is not available in sufficient quantities or is
not of satisfactory quality
© 2019 Cengage. All rights reserved.
92
Other Nontariff Trade Barriers
(3 of 5)
• Social Regulations
• Correct a variety of undesirable side effects
markets ignore
• Health, safety, and the environment
• CAFÉ Standards
• Corporate average fuel economy standards
• Passenger cars: 37.8 miles per gallon (2016)
• Light trucks: 28.8 miles per gallon (2016)
© 2019 Cengage. All rights reserved.
93
Other Nontariff Trade Barriers
(4 of 5)
• Europe Has a Cow over Hormone-Treated
U.S. Beef
• Ban on hormone-treated meat
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94
Other Nontariff Trade Barriers
(5 of 5)
• Sea transport and freight regulations
• U.S. shipping companies serving Japanese ports
complained of highly restrictive system of port
services
• Required to clear every detail of visits with Japan’s
stevedore-company association
• Dockworkers available only 18 hours a day or less
• Made U.S. goods more expensive in Japan
• In 1997, U.S. and Japan, on brink of trade war,
reached agreement to liberalize port services in
Japan
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95
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