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Tariff and Non-Tariff Barriers
Nitya Nanda
The Energy & Resources Institute (TERI)
Fourth RIS-EXIM Bank Summer School on
International Trade Theory and Practice
Outline
Introduction/key terms/concepts
Partial Equilibrium Analysis of a Tariff
The Theory of Tariff Structure
General Equilibrium Analysis of a Tariff
The Optimum Tariff
Tariff structure and effective protection
Export subsidy
Import quota
Voluntary export restraints
Changing Tariff scenario and impacts
Measuring NTBs
Introduction
While it is generally accepted that free trade
maximizes world output and benefits all
nations.
Trade policies are advocated by special groups
that stand to benefit from trade restrictions
Most nations impose some restrictions on the
free flow of international trade
Trade Policy
Actions taken by government to influence the
country’s volume and composition of trade
Types of Commercial Policy
Tariff
Quota
Subsidy
Nontariff Barriers
Tariff, Quota and Subsidy
Tariff
A tax imposed by government on either imports or
exports
Quota
A government-imposed limit on the value or quantity of
an import or export good
Subsidy
A government payment to a domestic industry to
encourage exports or discourage imports
Nontariff Barriers
A wide range of government policies other than tariffs
designed to affect the volume or composition of a
country’s international trade
These NTBs include:
Health and safety standards (SPS/TBT)
Pre-shipment inspection
Government procurement policy
Price control
Anti-dumping (though it is in form of a duty)
Chanellization
An import tariff is a tax or duty levied on
imported commodities.
This is the most common form of tariff.
An export tariff is a tax on exported commodities.
Not imposed by many countries, but occasionally
practiced in some countries to generate government
revenue or discourage export of some commodities
Recently caused some controversy including dispute at
the WTO
Import vs. export tariffs
Ad valorem tariff
A fixed percentage on the value of the traded
commodity.
Specific tariff
A fixed sum per physical unit of a traded
commodity.
A compound tariff
A combination of an ad valorem and specific tariff.
Types of tariff
Resulting Effects of Tariff
Consumption effect
Reduction in domestic consumption (increase in domestic
consumption in case of export tariff)
Production effect
Expansion of domestic production (Decline in domestic production in
case of export tariff, but expansion of final good can happen if the
export tariff is on inputs)
Trade effect
Decline in imports (or exports in case of export tariff)
Revenue effect
Revenue collected by the government
Resulting Effects of Tariff (2)
Consumer surplus is the difference between what
consumers would be willing to pay and what they
actually pay.
Imposition of a tariff reduces consumer surplus.
Increase in producer surplus, or rent, is the payment
that need not be made in the long run to induce
domestic producers to supply additional goods with the
tariff.
Also called subsidy effect of tariff.
Resulting Effects of Tariff (3)
Tariff redistributes income -
From domestic consumers (who pay higher price for the
commodity) to domestic producers (who receive the higher
price)
From nation’s abundant factor (producing exports) to the
scarce factor (producing imports).
But the effect of tariff in a small nation is totally
different from the effect of a tariff in a large nation
Tariffs and partial equilibrium (small country)
quantity
demand
supply
price
q0 q1 q4q3q2
p0
p0(1+t)
p2
imports without tariff
imports with tariff
tariff
increase producer surplus
net loss; Harberger triangles
decrease consumer surplus
government revenue
Two Deadweight Costs of the Tariff
Production deadweight cost—refers to the protective effect
of the tariff which allows domestic firms to increase
production above free trade levels (left triangle).
Consumer deadweight cost—the value of lost consumer
satisfaction due to a shift in consumption
to less-desired substitutes brought on by the higher price
(right triangle).
Total deadweight cost = ½ x tariff x reduction
in imports
Tariffs and partial equilibrium (large country)
quantity
demand
supply
price
q0 q1 q4q3q2
p0
p1(1+t)
p2
imports without tariff
imports with tariff
tariff
p1
increase producer surplus
= net loss; possible gain
decrease consumer surplus
government revenue
-/-
General Equilibrium Analysis of a Tariff in a Small Country
A small nation will not affect prices on the world market
when imposing a tariff.
Domestic price of importable commodity will rise by the full
amount of the tariff for individual producers and consumers
in the small nation.
Price remains constant for nation as a whole because the
nation collects the tariff.
Volume of trade for small nation declines, but terms of trade
do not change, so welfare always falls.
The Stolper-Samuelson Theorem
It postulates that an increase in the relative price of a commodity raises the return or earnings of the factor used intensively in the production of the commodity.
For example, when a nation imposes an import tariff on X, Px/Py rises for domestic producers and consumers and it will raise the real wage of labor if X is labor intensive.
The Stolper-Samuelson theorem is always true for small nations and is usually true for large nations as well.
However, if tariffs are imposed on both the products then it will not be valid
General Equilibrium Analysis of a Tariff - Large Nation
When a large nation imposes a tariff, its offer curve shifts or rotates toward the axis measuring its importable commodity by the amount of the import tariff.
The reason is that for any amount of the export commodity, importers now want sufficiently more of the import commodity to also cover (i.e., pay for) the tariff.
Under these circumstances, in a large nation
A reduction in trade volume will reduce welfare
An improvement in terms of trade will increase welfare
The reduction in the trade volume, by itself, tends to reduce welfare, while the improvement in its terms of trade tends to increase welfare - Whether welfare actually rises or falls depends on the net effect
General Equilibrium Analysis of a Tariff - Large Nation
The Optimum Tariff
An optimum tariff maximizes the net benefit resulting from
the improvement in the nation’s terms of trade against the
negative effect from declining trade volume.
As the terms of trade improve for the imposing nation, those
of the trade partner deteriorate, reducing welfare for the trade
partner.
Trade partner will likely retaliate and impose its own optimum
tariffs.
World as a whole is made worse off as gains from optimum
tariff are less than losses of trade partner.
0
1
2
3
0 1 2 3
export ManufacturesA ; import ManufacturesB
imp
ort
Food A
; e
xport
Food
BofferA no tariff
offerB
offerA tariff
C
D
The ‘optimal’ tariff?
Imposing tariff rotates offer
curve, influences equilibrium
0
1
2
3
0 1 2 3
export ManufacturesA ; import ManufacturesB
imp
ort
Food A
; e
xport
Food
B
offerA no tariff
offerBofferA tariff
trade
indifference
curves
C
D
The ‘optimal’ tariff?
Tangency of trade indifference
curve with foreign offer curve
determines ‘optimal’ tariff
0
1
2
3
0 1 2 3
export ManufacturesA ; import ManufacturesB
imp
ort
Food A
; e
xport
Food
BofferA no tariff
offerB no tariff
offerA tariff
offerB tariff
C
D
E
F
Optimal tariffs and retaliation
Tariff war leads to
bad outcome for all
The Theory of Tariff Structure
The Rate of Effective Protection
Indicates how much protection is actually provided
to domestic producer of import-competing
commodity.
When a nation imposes a lower tariff on imported
inputs than on the final commodity produced with
the inputs, the rate of effective protection exceeds
the nominal tariff rate.
Effective Rate of Protection
Nominal tariff: it is calculated on the value of the final commodity. It is important to consumers because it indicates the increased price.
Effective rate of protection: it is calculated on the domestic value added that takes place in the nation. It is important to the producers because it indicates how much protection is actually provided to the domestic processing and import-competing commodity.
Measurement of the ERP
The Rate of Effective Protection
Calculated as follows:
g = t - aiti
1 - ai
g = rate of effective protection
t = nominal tariff rate on final commodity
ai = ratio of cost of imported input to price of final
commodity with no tariff
ti = nominal tariff rate on imported input
Export Subsidy
An export subsidy can also be specific or ad valorem
A specific subsidy is a payment per unit exported (Korean, 1960s).
An ad valorem subsidy is a payment as a proportion of the value exported.
An export subsidy raises the price of a good in the exporting
country, making its consumer surplus decrease (making its
consumers worse off) and making its producer surplus increase
(making its producers better off). Also lowers the price in foreign
countries.
Also, government revenue will decrease.
In contrast to a tariff, an export subsidy worsens the terms of trade
by lowering the price of domestic products in world markets
Export subsidy
• What happens when Home subsidies the export of its good?
• Subsidy lowers the world price of the export to Ps*, while Home firms see Ps* plus the subsidy, i.e. Ps.
• Home welfare effects:– CS=-(a+b),
PS=+(a+b+c), cost of subsidy= b+c+d+e+f+g.
– Net Loss = (b+d+e+f+g)
– = DWL (b+d) + ToT loss (e+f+g)
Export tax like import tariff
This is called ‘Lerner’s symmetry’
The basic point is almost trivial.
With two goods and only relative prices mattering, the impact on the relative price of raising the numerator is the same as lowering the denominator.
Import tariff raises the internal price of imports relative to exports.
Export tax lowers the internal price of exports to imports (since now domestic export firm sell less abroad and more at home, so home price falls).
Import Tariffs and Distribution of Income Across Countries
When the domestic country imposes an import tariff, the terms
of trade increases and the welfare of the country may increase.
The magnitude of this effect depends on the size of the domestic
country relative to the world economy.
If the country is small part of the world economy, its tariff (or subsidy)
policies will not have much effect on world relative supply and demand,
and thus on the terms of trade.
But for large countries, a tariff rate that maximizes national welfare at
the expense of foreign countries may exist.
Import Quota
An import quota is a restriction on the quantity of a good that may be imported.
This restriction is usually enforced by issuing licenses to domestic firms that import, or in some cases to foreign governments of exporting countries.
A binding import quota will push up the price of the import because the quantity demanded will exceed the quantity supplied by domestic producers and from imports.
Import Quota (cont.)
When a quota instead of a tariff is used to restrict
imports, the government receives no revenue.
Instead, the revenue from selling imports at high prices goes to
quota license holders: either domestic firms or foreign
governments.
These extra revenues are called quota rents.
Voluntary Export Restraint
A voluntary export restraint works like an import quota, except that the quota is imposed by the exporting country rather than the importing country.
However, these restraints are usually requested by the importing country.
The profits or rents from this policy are earned by foreign governments or foreign producers.
Foreigners sell a restricted quantity at an increased price.
Correcting a Trade Deficit
If a country is running a persistent deficit on the trade balance, there are generally two policy options that can be used to correct it.
Exchange rates: Providing the Marshall-Lerner condition holds, a depreciation in the exchange rate will lead to an improvement in the trade balance. In this respect, trade deficits may be self correcting. For example, suppose there is a large increase in imports which leads to a deterioration in the trade balance. However, this also increases the demand for foreign currency, and reduces the demand for domestic currency, so the exchange rate will depreciate any way. Therefore, automatic correction should result.
Correcting a Trade Deficit
Absorption approach: From the national income identity, the trade balance is simply:
For a given level of output, the trade balance can be improved by simply reducing domestic absorption: (C+I+G). These are components of aggregate demand. If these exceed the level of domestically produced output (C+I+G>Y), then the demand for goods and services can only be met by imports.
Likewise, if domestic absorption is less than domestic output (C+I+G<Y), there is no need to import goods and the excess production can be exported.
Any policy which controls the absorption factors – consumption, investment and government spending – will influence the trade balance.
GICYMX
Tariffs have been sharply reduced since World
War II.
Tariffs average 5 percent or less on industrial
products in developed nations, but are higher
in developing nations
GATT/WTO played a major role in this and
also pressure for multilateral institutions
Restriction on tariffs is the core of WTO
arrangement
Changing Tariff Scenario and GATT/WTO
Falling Tariffs – Income Group Wise 1988-2012
Note: WLD=World, LMC=Lower Middle Income Countries, UMC=Upper Middle Income Countries,
HIC=High Income Countries, LIC=Low Income Countries, SAS=South Asia. Tariff figures zero indicate data
are not available
Falling Tariffs – Region/Country Wise 1988-2012
Note: USA=United States, EAS=East Asia and Pacific, EUU=European Union,
LCN=Latin America and Caribbean, SSF=Sub-Saharan Africa, SAS=South Asia,
WLD=World. Tariff figures zero indicate data are not available
Changing Tariff Profiles of India
1997-98 2001-02 2006 2010 2015
Product group Avg.
Tariff
Peak
Tariff
Avg.
Tariff
Peak
Tariff
Avg.
Tariff
Peak
Tariff
Avg.
Tariff
Peak
Tariff
Avg.
Tariff
Peak
Tariff
Sugar Confec. 34.4 60 34.4 60 35.9 60
Beverages and
spirits
114.8 260 96.9 210 70.8 150 70.8 150 68.6 150
Fish products 20.3 60 35 35 29.6 30 29.6 30 29.9 30
Minerals 37.5 45 30.6 55 7.4 10 7.4 10 7.9 15
Metals 32.5 45 32 35
Chemicals 34.6 192 33.8 170 7.9 100 7.8 10 7.9 10
Leather, footwear 39.8 45 32.1 35 10.1 70 10.1 70 10.1 70
Paper/furniture 30.1 45 29.3 35 9.1 10 9.1 10 9 10
Textiles 43.7 55 31.3 35 14.1 122 13.3 106 11.8 147
Apparel 19.9 97 15.1 315 12.3 53
Transport
equipment
41.7 45 40.5 105 14.8 100 15.5 60 19.4 100
Non-elec. mach 27.1 45 25.9 35 7.1 10 7.2 10 7.1 10
Elec Machinery 34.7 45 26.8 35 6.9 10 6.9 10 7.2 10
Petroleum 31.0 35 25 35 9 10 8.2 10 4.9 10
Other Non-agl 37.1 55 30 35 8.8 10 8.7 10 8.8 10
Tariff Structure for Agricultural Goods 2015
Country/Territory Simple average Non ad valorem
duties (Share of
HS 6 digit
subheadings in
per cent)
Maximum duty Number of
distinct duty
rates
Coefficient of
variation
Number
of tariff
lines
Bound MFN
applied
Bound MFN
applied
Bound MFN
applied
Bound MFN
applied
Bound MFN
applied
MFN
applied
Australia 3.4 1.2 1.7 0.9 29 16 36 8 143 172 838
Brazil 35.4 10 0 0 55 35 21 13 31 55 1031
China 15.7 15.6 0 0.3 65 65 38 46 75 75 1164
European Union 10.9 10.7 32 32.2 152 146 1090 822 120 119 2068
South Africa 40.4 8.5 0 13.8 597 115 52 145 131 135 1101
United States 4.8 5.2 41.3 41.5 350 350 818 789 346 324 1684
India 113.5 32.7 0.3 0.3 300 150 19 21 47 88 1496
Japan 16.6 12.9 15.1 11.6 595 595 352 308 230 237 1985
Korea, Republic of 57.9 56.8 5.2 3.2 887 887 183 90 215 240 1737
Norway 133.5 43.6 66.7 43.5 932 932 771 686 124 187 1409
Russian Federation 11 10.8 22.9 23.9 235 235 803 192 122 115 2684
39
Estimates of Total Agricultural Support (US$ million)
2010 2011 2012 2013 2014 2015
Australia 2118.85 2660.79 2168.86 2199.25 1882.27 1547.13
Canada 9347.94 9898.73 9867.56 7661.27 7183.09 6048.56
Japan 64690.6 72956.85 77019.84 60108.77 52025.63 40253.59
Korea 20002.65 23542.19 23323.97 24553.66 24570.64 22932.24
Mexico 7381.02 7897 8217.53 8237.31 8406.2 6480.85
New Zealand 413.89 573.62 581.21 541.25 560.57 485.04
Norway 3977.7 4343.33 4690.66 4356.3 4350.02 3582.73
Switzerland 6463.56 7596.46 7462.56 7095.42 8119.4 8516.11
United States 81751.91 83794.21 89236.87 87892.03 98094.22 76853.51
EU (28 countries) 121484.83 127345.22 127678.69 138201.15 125019.67 104244.85
OECD - Total 336625.71 356891.56 363957.77 351840.01 339838.59 282226.33
Brazil 11849.14 13546.67 8542.02 7609.55 8704.95 5181.18
China 157664.01 136467.25 247753.14 296833.27 313383.8 339708.34
Indonesia 27072.73 22540.12 26945.18 30858.86 35156.73 39585.19
Russia 18946.73 19238.98 16833.77 18557.63 17287.93
South Africa 684.08 933.76 1101.76 958.77 901.87 1052.58
40
Dollar and Kraay (2001)
‘post-1980 globalizers’, or developing countries that have ostensiblybeen more open to trade than others in the period from the early 1980’sto the late 1990’s, have grown faster than ‘non-globalizers’; and growthof trade volumes is associated with higher growth of average incomes
Globalizers identified by them are the top one-third in terms of theirgrowth in trade relative to GDP between 1975-79 and 1995-97
non-globalizers identified by them are actually ‘more globalized’ both interms of trade as a share of GDP (higher trade/GDP ratio) as well astariff barriers (lower average tariffs)
Why post-1980?
Some countries (non-globalizers) already liberalised and no further scope of
liberalisation…but experiencing low growth?
Trade => growth or growth => trade?
Is trade-GDP ratio an appropriate measure of globalisation?
Trade, Tariff and growth
Trade/GDP
Average Tariffs
Growth of Global Economy
Measuring NTBs
produce estimates of price effects and translate them into the ad
valorem equivalent (also referred to as implicit tariffs or implicit
rates of protection)
the frequency index and the coverage ratio:
The frequency index simply captures the percentage of products that are
subject to one or more NTMs.
The coverage ratio captures the percentage of imports that are subject to
one or more NTMs
Price comparison (Before and after)
Quantity impactGravity models
Computable general equilibrium models
Cost-benefit analysis
WTO and NTMs
WTO members have the right to adopt technical regulations, standards and conformity assessment procedures but these must not constitute unnecessary
obstacles to international trade
WTO members have the right to adopt measures to protect human, animal or plant life or health, but these must not constitute unjustifiable discrimination between Members or a disguised restriction on international trade
Similarly, there are agreements on pre-shipment inspection and anti-dumping and a plurilateral agreement on government procurement
Incidence of NTBs
NTBs by Region
Concluding Observations
Tariffs can promote domestic industry and generate revenue in
developing countries as well as dealing with balance of trade
NTMs affect developing countries disproportionately as often
they are far above internationally accepted standards
Standards of course can also make products from other
countries acceptable
India has often benefitted from SPSs/TBTs as its competitor
countries could not meet the standards
Public procurement is often used as development tool by
developing countries
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