Tariffs

Tariff

A tax levied on a product when it crosses national boundaries.

Import tariff

A tax levied on an imported product, collected before shipment can be unloaded in domestic port.

Export tariff

A tax imposed on an exported product, less common and illegal under U.S. Constitution, commonly used by developing nations

Protective tariff

A tariff that protects domestic producers from foreign competition and facilitates an increase in output of import-competing producers.

Revenue tariff

A tariff that generates tax revenues by placing tariffs on either imports or exports, commonly used by developing nations as a major source of income

Specific tariff

tariffs that have an incurring charge added to a fixed amount per unit of an imported product, provide domestic producers increased protection during a recession

Ad valorem tariff

tariffs that require a certain percentage of imported goods to be paid on top of whatever amount of money a country is paying for the product itself, primarily used with manufactured goods.

Compound tariff

a tariff that includes the specifications of both ad valorem & specific tariffs; provides protection to both raw material suppliers and the finished-goods industry.

Tariff avoidance

finding legal ways to pay less in tariffs

imposing tariffs

protective & revenue

nominal tariff rate

the initial price you pay for an imported good

effective tariff rate

the actual amount you pay for an imported good which takes into account not only the nominal tariff rate on a product but also any tariff rate applied to imported inputs that are used in producing the finished product

Tariff escalation

When the rate of tariffs on goods rises the more the goods are processed. This protects an importing country's manufacturing industry by placing lower tariffs on imports of raw materials, and higher tariffs on finished products.

Offshore Assembly Provision (OAP)

- Provides favorable treatment to products assembled abroad from US-made components

- Incentivizes foreign manufacturers to purchase components from US sources

Tariff evasion

cheating the tariff system and paying fewer tariffs by illegal means (ex: smuggling imported goods into a country)

Bonded warehouse

A warehouse where dutiable imports can be brought into a country and temporarily left duty-free, owners of warehouses must be bonded to ensure customs duty obligations are satisfied.

Foreign-Trade Zone (FTZ)

An area in a country where businesses operate without paying duties on imported products or materials as long as they remain in the area and do not enter the domestic marketplace.

when are custom duties due in a FTZ

custom duties are due when goods are transferred from FTZ for domestic consumption

tariff effects

tariffs make items more expensive for consumers which ends up reducing demand

Consumer surplus

difference between what buyers are willing and able to pay and the amount they actually pay for a product (inverse relationship)

Producer surplus

difference between what producers are willing and able to receive and the amount they actually receive for a product (direct relationship)

Small-nation model

A model where small nations import a very small portion of the world market supply and are unable to impact market price

tariff effects on small nations

- raise in domestic price of imported good by tariff price

- higher domestic production & producer surplus

- lower domestic consumption and consumer surplus

revenue effect

Government's collections of duty

redistributive effect

transfer of consumer surplus to domestic producers

protective effect

loss to domestic economy from wasted resources used to produce at increasing unit costs

consumption effect

Decrease in consumption resulting from tariff's artificially increasing price

deadweight loss

the total loss of producer and consumer surplus from underproduction or overproduction (protective + consumption)

Large-nation model

a model where tariffs might make a country better off if the country is big enough that when it buys or doesn't buy a lot of stuff from other countries, it affects the prices all around the world

domestic revenue effect

the amount of tariff revenue shifted from domestic consumers to the tariff-levying government

Terms-of-trade effect

the tariff revenue extracted from foreign producers in the form of a lower supply price

Optimal tariff

when a country tries to put just the right amount of tax on imports (goods from other countries) to protect its own industries without causing too much harm

Regressive Tariffs

taxes that hit people with lower incomes harder

Protectionism

The policy of imposing trade barriers to protect domestic industries from foreign competition.