Tariffs Flashcards
(45 cards)
Specific / unit tariff =
Fixed charge per unit of imported goods.
Ad valorem tariff =
Fraction of the value of the imported good.s
What’s the oldest form of trade policy?
Tariffs
Info on when corn laws introduced and why?
1815 until 1846
To protect UK agriculture against grain imports from Denmark and Prussia
After when did % of government revenue coming from tariffs substantially decrease in US?
Civil war 1861-1865
What type of analysis do we do for a tariff?
Partial equilibrium - we look at effects on a single market
If in Autarky P* wheat < P wheat, who exports and who imports once we open up?
Foreign exports
Home imports
2 simplifying assumptions for tariff analysis
- No transport costs
2. One world currency
How do we find the Autarky price of wheat?
Where D=S in domestic market
How do we draw MD curve? What does it look like?
MD curve = 0 at Autarky price.
Slopes down - lower p = higher demand, lower supply = more imports
How do we draw XS curve and what does it look like?
XS curve = 0 at foreign Autarky price.
Slopes up - Higher price = higher supply, lower demand = more exports
World equilibrium free trade at
MD = XS
import demand = import supply
Implies world demand = world supply
How does Pw relate to 2 Autarky prices?
Pw is between 2 Autarky prices.
After a tariff, when are foreign exporters willing to export?
Since trade increase transport costs, only willing to export if compensated enough by price differential.
Price differential > tariff
Or price UK - tariff > price Denmark
At the original world price, how do demand and supply react in home and foreign?
The tariff makes some shippers unwilling to export
So excess demand at home
Excess supply in foreign
How does a tariff cause prices in home and foreign to change relative to the free trade price?
Excess demand at home —> price rises PT > Pw
Excess supply at home —> price falls PT* < Pw
What’s the tariff equilibrium?
Prices adjust until: PT - PT* = t
Arbitrage argument.
At this price differential, quantity of imports = quantity of exports.
How does a tariff affect world trade?
It reduces it since MD and XS both contract.
How much does PT rise by after the tariff in the economy is large?
Rise in PT < tariff
Pass through / incidence < 100%
Shared burden between home consumers & foreign producers.
Why is the foreign incidence typically low?
Because foreign = ROW
When is the tariff incidence 100% for home? How does this affect prices?
If the importing country is sufficiently small, it has no power to influence foreign’s price since its demand is a small part of world demand.
Hence: PT* = Pw, PT = Pw + t
Effective rate of protection definition
How much protection a tariff provides to domestic producers
Effective rate of protection formula
VT - Vw / Vw
The change in value added in production from free trade to tariff equilibrium.
Why is the effective rate of protection usually not equal to the tariff rate?
Because the tariff affects many sectors other than the protected sector.
