Trade Barriers

Tariffs
Unit 13 - Lesson 4

Learning outcomes:
Evaluate the effect of different types of trade protection.
Explain using a tariff diagram the effects of imposing a tariff on
imported good to the various stakeholder - domestic producers,
domestic consumers, government and foreign producers.

Free Trade
Absences of government intervention in any
kind of trade that occurs between countries.
Free Trade in theory based on Absolute and
Comparative Advantage would lead to:
1. Efficient Global Allocation of Resources
2. Maximization of Global Output
3. All countries sharing in and benefiting from
free trade.

http://www.teara.govt.nz/files/c-24797-pc.jpg

Country does not trade

A country that does not trade will produce &
consume where
Supply*(domestic) = Demand*(domestic)
Consumer Surplus: area above P-domestic
and below the Demand*(domestic)
Producer Surplus: area below P-domestic and
above the Supply*(domestic)
http://3.bp.blogspot.com/-UPIlIECIYw/UNSLAZoC4nI/AAAAAAAAEws/iMw6lO1bROE/s1600/Slide1.JPG

Country trades - imports goods

Since the World Price is less than the P
(domestically) a country should import goods.
Results:
1.
2.

Domestic Production decreases.

Domestic Consumption increases Domestic Production + Imports.

Consumer Surplus: increases from

to A + B + D
Producer Surplus: decreases from
B + C to C

A
http://mrski-apecon-2008.wikispaces.
com/file/view/import.png/48275705/import.png

Country - Exports

World Price is above Domestic Price

Country should export because they will receive
the World Price.
Decrease in Domestic consumption due to
increase in Price
Increase in Domestic production because
producers are willing to provide more because
the price increased.

Consumer Surplus: decreases (loss of domestic

Consumer Surplus)
Producer Surplus: increases (gain the area the
domestic consumers lost).

http://thismatter.com/economics/images/trade-producersurplus.png

Trade Protection
Trade Protection:
Government intervention into the global
trade market creating barriers to trade that
prevent the free flow of goods and services
between borders.
Include:
1. Tariffs
2. Quotas
3. Subsidies

http://media.economist.
com/images/20081220/D5108LD1.jpg

Tariff
Also known as custom duties are the
most favored form of trade protection.
Taxes on imported goods.
Some reasons for countries pursuing
this form of trade barrier:
1.
2.

To protect domestic firms.

Raise revenues for the government
http://s3.amazonaws.
com/readers/2011/02/23/tariff_2.jpg

Tariff Graph
The duty is placed on the World Price causing it to
shift upward to P+tariff.

Qd(domestically) decreases from Qc1 - Qc2.

Qs(domestically) increases from Qs1 - Qs2.
Imports decrease from (Qc1 - Qs1) to (Qc2 -Qs2)
Consumer Surplus domestically decreases
Producer Surplus domestically increases
Government Revenue:
(Qc2 -Qs2) x (P-tariff - P-world)
https://upload.wikimedia.
org/wikipedia/commons/thumb/4/4d/EffectOfTariff.
svg/450px-EffectOfTariff.svg.png

Effects of Tariffs
Domestic Consumers are worse off due to the increase in Price resulting in a
decrease in the domestic Quantity Demanded.
Domestic Producers are better off due to the increase in price allows them to
sell more.
Domestic employment increases.
Government gains revenue from the taxes.
Domestic income distribution worsens as consumer surplus decreases which
burdens the lower income people.
Increase inefficiency in production: Essentially allows the inefficient firms who
were not able to produce in the market, now enter the market.
Foreign Producers are worse off
Global misallocation of resources.