International Economics 2

8/7/2019 International Economics 2

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International Economics

lecture no.2

Prof. Mazahir saifee



Origin of word

A tariff (from Arabic: , translit. tariffa:

"fee to be paid") is a duty imposed on goods

when they are moved across a political

boundary.



History

They are usually associated with protectionism, theeconomic policy of restraining trade between nations.For political reasons, tariffs are usually imposed onimported goods, although they may also be imposed

on exported goods. In the past, tariffs formed a much larger part of

government revenue than they do today.

When shipments of goods arrive at a border crossingor port, customs officers inspect the contents andcharge a tax according to the tariff formula. Since thegoods cannot continue on their way until the duty ispaid, it is the easiest duty to collect, and the cost of collection is small. Traders seeking to evade tariffs areknown as smugglers.



Objectives of imposing tariffs

The main objectives of imposing trade barriers

are to protect domestic industries from

foreign competition, to guard against

dumping, to promote indigenous research and

development, to conserve the foreign

exchange resources of the country, to make

the balance of payments position morefavorable, and to discriminate against certain

countries.



Tarrifs

A tariffs is a tax or duty levied on goods when

they enter and leave the national frontier or

boundary.

A tariffs refers to import duties and export

duties.

But for practical purposes, a tariff is

synonymous with import duties or custom

duties.



Tarrifs



Types of tariffs

Tariffs are classified in a number of ways.

On the basis of purpose:- tariifs are used fortwo different purposes; revenue and forprotection

1. Revenue tariff :- Revenue tariff are meant toprovide the state with revenue. Revenue

duties are levied on luxury consumer goods.the lower the duties, the larger the revenuefrom them



Cont.

2. Protective tariff :- protective tariffs are meant

to maintain and encourage those branches

of home industry protected by the duties



Following types of tariff duties are

levied

Ad valorem duty:-the most common type of duty

is the ad valorem duty. It is levied as percentage

of the total of the imported common duty. The

import duty is a fixed percentage of the CIF value

of the commodity. It may be 25% , 50% and so

on.

Specific duty:- are leived per physical unit of theimported commodity, as rs X per tv, as cloth per

metre, as oil per litre, as fertilizers per tonne etc.



Cont.

Compounded duty:- often, governments levy

compound duties which are a combination of

ad valorem and specefic duities.in this case,

units of an imported commodity are levied a

percentage ad valorem duty plus a specefic

duty on each unit of the commodity. For

instance, a country may impose an importduty on a car at the fixed rate of rs 1 lakh+10%

on the price of car



Cont.

Sliding scale duty:-sometimes governments

levy import duties which vary with the prices

of commodities imported. such duties are

known as sliding scale duties which may be

either ad valorem or specific. Normally, sliding

scale duties levied on specefic basis.



On the basis of country-wise

discrimination

1. Single column tariff :-when a uniform rate of duty is imposed on all similar commoditiesirrespective of the country from which they areimported, it is called single column tariff.

2. Double column tariff :- under this system, twodifferent rates of duty exist for all or some of thecommodities. The government of the countrydeclares both the rates at the beginning or one

at the beginning and another after settling therates under trade agreements. They can beclassified as follows:-



Cont

General and conventional tariff s

Maximum and minimum tariff s

3. Multiple or triple column tariff s:- under themultiple column tariff system, two or more

tariff rates are levied on each category of

commodity. But the usual practice is to have

three different lists of tariffs, i.e. general,

intermediate and prefential.



On the basis of retaliation

There are two ways to levy import duties on

the basis of retaliation:-

1. Retaliatory tariff s2. Countervailing Duty



Effects of tariffs

Tariffs have a variety of effects which isdepend upon their power to reduce imports.The effects of tariffs may be analyzed from the

stand point of the economy as a whole whichis known as the general equilibrium analysis.Or, they may be discussed from the point of view of a particular good or market which is

known as the partial equilibrium analysis.



Effects of tariffs

Protective or production effect

Consumption effect

Revenue effect Redistributive effect



Impact of Tariff

Tariffs affect on economy in different ways. An import duty

generally has the following effect:

(I) Protective Eff ect

An import duty is likely to increase the price of imported

goods. This increase in the price of imports is likely to reduceimports and increase the demand for domestic goods. Import

duties may also enable domestic industries to absorb higher

production costs. Thus, as a result of the production accorded

by tariffs, domestic industries are able to expand their output.

(ii) Consumption Eff ect

The increase in prices resulting from the levy of import duty

usually reduces the consumption capacity of the people.



Cont

(iii) Redistribution Eff ect

If the import duty causes and increase in the price of domestically

produced goods, it amounts to redistribution of income

between the consumers and producers in favour of the

producers. Further, a part of the consumer income is transferredto the exchequer by means of the tariff.

(iv) Revenue Eff ect

As mentioned above, a tariff means increased revenue for the

government (unless, of course, the rate of tariff is so prohibitivethat it completely stops the import of the commodity

subject to the tariff).



Cont.

(v) Income and Employment Eff ect

The tariff may cause a switchover from spending on foreign

goods to spending on domestic goods. This higher spending

within the country may cause an expansion in domestic income

and employment.

(vi) Competitive Eff ect

The competitive effect on the tariff is, in fact, an anti-competitive

effect in the sense that the protection of domestic

industries against foreign competition may enable the domesticindustries to obtain monopoly power with all its associated

evils.



Cont..

(vii) Term of Trade Eff ect :-In a bid to maintain theprevious level of imports to the tariff imposing

country, if the exporter reduces his prices, the

tariff -imposing country is able to get imports at a lowerprice. This wills, ceteris paribus, improve the terms of trade of the country imposing the tariff.

(vii) Balance of Payments Eff ectTariffs, by reducing the volume of imports, may help the

country to improve its balance of payments position.



Diagrammatic presentation of Effects

of tariffs

Documents

International Economics 2