Tariffs

3 types of import tariffs

• Ad valorem tariff: fixed percentage. For example, trump raised the steel and aluminium tariffs from 10% to 25%

• Specific tariff: a fixed per-unti duty. For UK imports raw sugar faces tariffs of £280 per tonne.

• Compound tariff: combination of both. UK imports for yoghurts faces tariffs of £79 per 100kg and 4.5% of the value.

Implications of tariffs depending on being a small or large country

Small country

• a change in imports does not affect international markets

• the imposition of a tariff does not change the international price

• the country acts as a price taker

Large country

• a change in imports affects international market

• the impostion of a tariff changes the international price.

Consumer surplus

The difference between what customers are willing to pay vs what they actually pay.

Producer Surplus

the difference between the price at which producers are willing to sell and the actual price they receive.

Tariffs in a small country

• Consider a small country with demand and supply of a product. The equilibrium is shown by A.

• Given a low world market price Pw without tariff the country imports q1q2.

Tariffs in a small country

• Given a tariff t, the country reduces imports from q1q2 to q3q4.

Welfare anlysis - Consumer

• Consumer surplus reduces as shown in the graph.

• -(a+b+c+d)

Welfare analysis - Producer

• producer surplus increases as shown in the graph.

• +a

Government revenue from a tariff

• import q3q4 x tariff t per unit

• +c

Welfare Summary

Tariff in a large country (without tariff graph)

Tariff in a large country

Consumer welfare analysis

• Consumer surplus decreases

• -(a+b+c+d)

Producer welfare analysis

• producer surpluse increases

• +a

Government revenue

Welfare Summary

• a large country as the power to affect the import price and can receive terms of trade gains.

• Termss of trade is export price/import price. For each unit you export how much can you buy from import.

• Lower import prices means an improvement in terms of trade.

• This only works if there is no retaliation.

Opitmal tariffs

• the optimum tariff is the one that leads to the maximum amout of overall welfare.

Only holds without retaliation example

• US is the worlds largest steel importer making it a clear large country. In 2018 Trump imposed 25% and 10% tariff on imported steel and alluminium respectivley.

• However, instead of seing welfare gains and price drops. The EU filed a WTO challenge and put tariffs on over 180 types of US goods.

Example to say it does work for large country

• China is the world largest importer of soybeans and meat.

• A fall in import demand from China due to a tariff would shock world markets and likely lower the world prices of commodities.

Defining large vs small example

• Large or small in the market share of imports not in terms of size.

• Russia are large but not in the coffee imports so would be a small country.

• Vietnam are smaller but are larger in the coffee import markets so would be seen as the larger company.