International Economics Study Notes

Tariff Concept and Types

• Tariff: A tax (duty) imposed on products crossing national borders.
  • Import Tariff: Tax on imported products, most common; collected before unloading at domestic ports.
  • Export Tariff: Tax on exported goods, less common, often illegal in the U.S. but used by developing nations.
• Protective Tariff: Designed to protect domestic producers from foreign competition and increase output of domestic producers.
• Revenue Tariff: Aims to generate tax revenue, currently representing only 1% of total federal revenue in the U.S.; developing nations often rely heavily on tariffs for income.

Table 4.1: Taxes on International Trade as a Percentage of Government Revenues (2013)

Types of Tariffs

• Tariffs can be specific, ad valorem, or compound:
  • Specific Tariff: A fixed amount charged per unit of imported product (e.g., $0.15/unit).
  • Easy to enforce but provides varying protection as prices change.
  • Ad Valorem Tariff: Based on a percentage of the imported product's value (e.g., 15% per unit).
  • Applies mostly to manufactured goods and maintains protection consistency across economic cycles.
  • Compound Tariff: Combination of specific and ad valorem tariffs applied to manufactured goods made from raw materials subject to tariffs.

Customs Valuation

• Determining the value of imported products can be complex:
  • Free-on-board (FOB): Used in the U.S., based on the product's value when leaving the exporting country.
  • Cost-insurance-freight (CIF): Used in Europe, considers total value upon arrival in the importing country.

Effective Rate of Protection

• Nominal Tariff Rate: The rate found in the tariff schedule.
• Effective Tariff Rate: Considers nominal tariffs and tariffs on imported inputs.
  • Effective tariff rate ($e$) is expressed as: $e = \frac{n - a imes b}{1 - a}$ where:
    • $n$ = nominal tariff rate on final product
    • $a$ = value of imported input to final product
    • $b$ = nominal tariff rate on imported input
• Effective Rate of Protection Calculation: Illustrated through examples comparing scenarios with and without tariffs on inputs.

Example Calculation

For Dell's Desktop:

• Nominal tariff imposed: 10%
• Imported components enter duty-free (tariff rate = 0%).
  • Calculation for effective rate of protection:
    $e = 0.10 - (0.8)(0) / (1 - 0.8) = 0.5$
• If the components incur a 5% tariff:
  $e = 0.10 - (0.8)(0.05) / (1 - 0.8) = 0.3$

Tariff Escalation

• Processed goods generally face higher tariffs than raw materials.
• Rates typically increase at each production stage, resulting in varying degrees of nominal and effective protection.

Tariff Escalation Example (2012)

Outsourcing & Offshore Assembly Provision

• Outsourcing: Common in the global economy; involves producing goods in countries with lower labor costs.
• Offshore Assembly Provision (OAP): Favorable treatment for products assembled abroad using U.S. components, incentivizes purchasing U.S. components abroad.

Dodging Import Tariffs: Avoidance vs. Evasion

• Tariff Avoidance: Legal methods used to minimize tariff payments.
• Tariff Evasion: Illegal practices like smuggling; e.g., stripping Ford wagons to evade tariffs.

Bonded Warehouse and Foreign-Trade Zones (FTZ)

• Bonded Warehouse: Duty-free temporary storage allowed for dutiable imports in U.S.
  • Warehouse owners must be bonded to fulfill customs obligations.
• Foreign-Trade Zone (FTZ): Areas where businesses can operate without import duties, allowing for various processing activities. Customs duties are only applied upon transfer for U.S. consumption.

Tariff Effects

• Tariffs increase prices on imports, affecting consumer behavior and domestic production.
• Job loss can occur in sectors affected by retaliative tariffs.
  • Example: Retail or transportation sectors suffer from reduced imports.

Tariff Welfare Effects: Consumer and Producer Surplus

• Consumer Surplus (CS): Difference between what buyers are willing to pay versus what they actually pay.
• Producer Surplus (PS): Difference between what producers receive versus what they're willing to accept.
• Tariffs lead to reduction in CS, increase in PS, and create deadweight losses to the economy.

Tariff Welfare Effects Calculation Steps

1. Supply & Demand Equations: Established at equilibrium before and after tariffs are introduced.
2. Autarky Equilibrium: Price and quantity determined without trade.
3. Calculating Surplus: Areas of surplus calculated based on price changes and changes in quantity supplied/demanded after tariff implementation.

U.S. Tariff Case Studies

• Obama's Tariffs on Chinese Tires: Implemented to reduce imports and protect local jobs. Critics argued it hindered the market more than it helped.
• Footwear Tariffs: Remained in place despite the U.S. footwear industry largely outsourcing production.

Political Economy of Protectionism

• Political motivations significantly influence tariff policies, including job protection arguments and fears over cheap foreign labor.
• Economic arguments against tariffs focus on losses in consumer surplus and inefficiencies introduced into the economy.

Conclusion

• Overall, tariffs play a crucial role in shaping international trade economics, influencing domestic production, consumer pricing, and global market dynamics. Understanding their complexities helps inform better trade policy decisions and economic strategies across nations.