Chapter 4 Flashcards
Definition of Tariff:
Tax levied on a product as it crosses national borders- typically imposed on imports
Define import tariffs:
Most common, applied at the point of entry
Define export tariffs:
Rare, generally discouraged, and unconstitutional in the U.S.
Three main purposes of Tariffs
- Raise gov revenue
- Protect domestic industries from foreign competition
- Promote local employment and income
What are the three types of Tariffs?
- Specific tariffs: fixed monetary charge per unit of imported goods
- Ad Valorem Tariffs: % of the product’s value
- Compound tariffs: a combination of specific and ad valorem tariffs
Characteristics of Specific Tariffs:
- easy to administer
- degree of protection changes with import prices
- provides more protection during price declines (e.g. in recessions)
Characteristics of Ad Valorem Tariffs:
- keeps protection proportional to import prices
- more commonly used for manufactured goods
- sensitive to product valuation disputes
Characteristics of Compoun Tariff use:
- Often used for manufactured goods containing raw materials that are themselves tariffed
- Protects both the final good and the input supplier
What is the Effective Rate of Protection (ERP)?:
- Measures protection considering tariffs on both inputs and outputs
- ERP can exceed nominal tariff rates due to input tariffs
What is the offshore assembly provision? (OAP)
U.S. allowing tariff reductions on goods assembled abroad using U.S.-made components
What is tariff avoidance?
Legal methods such as transshipment or reclassification to avoid tariffs
What is tariff evasion?
Illegal practices like undervaluing shipments or mislabeling products
Why is there a notion of ‘postponing tariffs’?
Helps the firm manage cash flow and reduce the costs of imported components
What are the effects of tariffs?
- Raise domestic prices
- Lower consumption
- Increase domestic production
- Reduce imports
How do tariffs affect consumer and producer surplus?
-Tariffs reduce consumer surplus and increase producer surplus
-Net welfare loss includes deadweight losses from consumption and production inefficiencies
What does a small nation model do?
- Assumes the nation is a price taker in world markets
- Taridd creates a price wedge, causing DWL but no change in WP
What does a large nation model do?
-Large country may influence WP
-Tariff may improve national welfare if gains from TOT offset losses
What are export burdens from tariffs?
Tariffs can reduce the competitiveness of domestic export sectors through higher input costs or retaliation
What does “regressive nature of tariffs” mean?
Low-income households spend a higher share of their income on imported goods than high-income households, therefore, tariffs act like a regressive tax
What are some arguments for trade restrictions?
- Protect infant industries
- Ensure national security
- Preserve jobs in key sectors
- Retaliation or bargaining tool
What is the political economy of protectionism?
- Pressure from interest groups
- Politicians may favor short-term gains for specific constituencies
Why are there tensions between efficiency and politics?
- Economists support free trade for efficiency
- Politicians face pressure to protect sectors vulnerable to imports
