International Economics

Learning Objectives

♥ Types of Tariffs.

♥ Effects of tariffs.

♥ Types of Import Quotas.

♥ Effects of Import Quotas.

♥ Comparison of Tariffs & Quotas.

 International Economics

Tariffs refer to duties or taxes

imposed by the Government on commodities
which are imported into a
country from abroad.

Tariff is, there fore, synonymous

with import duties
also known as customs duties.
 International Economics

9.1 Types of Tariffs

There are four types of tariffs.

1. Ad Valorem : The ad valorem import duty

is possibly the most common tariff or
import duty.
It is normally expressed as a % of cif
value of the imported consignment.
It is fair in the sense that lower the
value of imported commodity, lower is the
duty payable on it.
 International Economics

9.1 Types of Tariffs

There are four types of tariffs.

2. Specific Import Duty : Here the duty is

imposed on the basis of number of units of
a commodity imported.

It is normally expressed as so many Rupees

per piece, litre, kg of commodity {Rs.
500/- per watch or per tonne of fertilizer
or per kilo litre of crude oil].
 International Economics

9.1 Types of Tariffs

There are four types of tariffs.
3. Compound Import Duty : Here the duty is a
combination of ad valorem and specific
duty.
It is normally expressed as x% of cif
value of import plus so many Rupees per
piece/litre/kg etc.
4. Sliding Scale Duty : Here the rate of ad
valorem or specific duty increases with
the quantity of commodity imported . [Rs
500/- per piece for first 100 watches, Rs
1,000/- per watch for 100 to 500 watches
etc.]
 International Economics

9.2 Tariffs & its Effects

Tariffs when imposed, affect the particular

commodity or market . These effects are
termed effects from ‘ Partial Equilibrium
Approach’.

They also affect nation’s economy as a

whole. These are studied from ‘General
Equilibrium Approach’.

Partial equilibrium approach has identified

eight effects of tariff.
 International Economics

9.2 Tariffs & its Effects

1.Tariff & Price Effect : Will tariff

increase price of a commodity in importing
country is determined by elasticity of
demand for the commodity in that country.
If it is elastic, the price will not rise
and burden is borne by the exporter. But
if it is inelastic, the price rises.

If elasticity is in between, the burden is

shared by two countries in proportion to
the degree of elasticity.
 International Economics

9.2 Tariffs & its Effects

2.Tariff & Protective Effect : If the intent

in imposing tariff is to protect domestic
industry from overseas competition,
logically revenue from such tariff is
negligible.

This substitution of foreign goods by

domestic goods is known as ‘import
substitution effect of tariff’.
 International Economics

9.2 Tariffs & its Effects

3.Tariff & Consumption Effect : Here the

idea in imposing duties is to reduce
consumption of imported goods.

4.Tariff & Revenue Effect : Since the intent

is to raise revenue, the tariff rate is
much lower, normally less than comparative
cost advantage. This ensures that quantity
imported does not reduce significantly and
revenue is raised for the country.
 International Economics

9.2 Tariffs & its Effects

5.Tariff & Terms of Trade Effect : Here if the

supply is inelastic and demand relatively
elastic, tariff burden will be borne by
exporter & importing country will gain
revenues. In this case tariff has favorable
impact on terms of trade.

6.Tariff & Competitive Effect : Tariff provides

protection to infant domestic industry,
allows it to grow; and ultimately be in a
position to meet foreign competition.
In reality, however, competition is nurtured
by removal of tariffs.
 International Economics

9.2 Tariffs & its Effects

7.Tariff & Income Effect : If tariff
protection succeeds in developing domestic
industry, there is more employment and
opportunities to earn income. But if full
employment is there, tariffs can cause
inflation and adversely affect real
income.
8.Tariff & Balance of Payment Effect:
Country facing continuous deficits in its
balance of payments, imposes tariffs in
selective manner to cut imports & reduce
deficits.
 International Economics

9.2 Tariffs & its Effects under conditions of general

equilibrium

When a country proposes tariffs, they

affect practically every sector of the
economy, alter trade, prices, output &
consumption, employment and reallocate
resources, change factor proportions,
redistribute incomes and alter balance of
payments.
 International Economics

9.2 Tariffs & its Effects under conditions of general

equilibrium

Under restrictive assumptions of two

countries, two products, perfect
competition etc., economists have proved
that tariffs can be used to increase
relative and absolute income of the
relatively scarce factor and lower that of
the abundant factor.
The benefit depends on the degree by which
tariff protection increases the internal
relative price of the goods protected by
tariff.
 International Economics

9.2 Tariffs & its Effects under conditions of general

equilibrium

Optimum Tariff:

Imposition of tariffs
has a consumption cost as with increase
in the price of the imported goods,
its consumption reduces.
has production cost because, with
protection offered, the industry
attracts factors from elsewhere where
they are more productively employed.
 International Economics

9.2 Tariffs & its Effects under conditions of general

equilibrium

Optimum Tariff:

The tariff is optimum when gains from

improved terms of trade consequent on
imposition of tariff, are more than sum
of the consumption cost and production
cost.
 International Economics

9.3 Import Quota System

By an import quota system is meant

permitting import of a fixed quantity of
commodity in value or by volume for a
period of one year.

Import quota system is practiced as an

alternative to the device of imposing
import duties or tariffs.
 International Economics

9.3 Import Quota System

Methods:

1.Grant an import licence of the

predetermined quantity of commodity [say
Rs 25 crores of watches] to the highest
bidder.

2.Grant licenses of the overall above amount

to importers on a first come first serve
basis.
 International Economics

9.3 Import Quota System

Methods:

3. Limit import of say watches by allowing

fixed amount of foreign exchange.

4. Import fixed quantity of commodity

through government agency like State
Trading Corporation.
 International Economics

9.3 Import Quota System

Objectives:
1.To provide protection and help development
of domestic industries by restraining
imports and thus restricting foreign
competition.
2.To bring about correction in balance of
payments position of the country.

3.To make rational use of foreign currencies

earned by exporting goods and services.
 International Economics

9.3 Import Quota System

Objectives:

4. To influence pattern of living of people

especially of the elite classes in
developing countries by reducing imports
of luxury goods.

5. To make use of import quota system as

retaliatory measure and extract
concessions in regard to country’s exports
to foreign countries.
 International Economics

9.3 Import Quota System

Types of Import Quotas:

1. Bilateral Quota Agreement: Here a country

fixes quota with each other country for
particular commodity through negotiation.

2. Unilateral Quota Fixation: Importing

country by law fixes a quota for import of
a particular commodity from a particular
country.
 International Economics

9.3 Import Quota System

Types of Import Quotas :

3. Tariff Quota Fixation System: Here up to

quota fixed imports are permitted at a
lower import duty. Higher duty is payable
for imports beyond the quota fixed.
4. ‘Mixing’ Quota System: Manufacturers are
required to use fixed % of locally
procured materials along with imported
materials when carrying production
process.
 International Economics

9.3 Import Quota System

Effects of Import Quotas :

1.Price Effects:

Import quotas result in fall in supply of

the commodity. Hence prices are likely to
increase. This increase depends on
restrictions on import quantity and
elasticity of demand for the commodity.
 International Economics

9.3 Import Quota System

Effects of Import Quotas :
2. Revenue Effects:
These are difficult to estimate. If the
licenses for restricted quantity are
auctioned the government gets its
revenues. If not the elasticity of demand
for the product decides whether there will
be price rise and whether importer or
exporter will enjoy it.
The decision also depends on how well
exporters or importers are organized to use
their group powers by forming combines.
 International Economics

9.3 Import Quota System

Effects of Import Quotas :
3. Consumption Effects:
Import quotas reduce supply of imported
commodity, as a result prices tend to rise
and consumption falls. Thus welfare is
adversely affected.

4. Protective Effect:
This rise in price provides incentive to
domestic industry to develop and
eventually be in position to meet overseas
competition.
 International Economics

9.3 Import Quota System

Effects of Import Quotas :
5. Terms of Trade Effect:
Generally it is observed that terms of
trade become favourable to the country
imposing quotas on a commodity.
6. Redistributive Effect:
Import quotas result in rise in prices for
domestic producers who earn more profits.
Consumers receive less and their welfare
is adversely affected.
 International Economics

9.3 Import Quota System

Effects of Import Quotas :

7. Balance of Trade Effect:

Since foreign exchange required to finance
imports is reduced by restricting imports
through quotas, there is a favourable
impact on balance of payments.

Amounts earlier spent on imported goods

are saved and may be used for domestic
savings & investment.
 International Economics

9.4 Import Quotas & Tariffs: A Comparison

The objectives of both are identical, namely
cutting down imports.
improve terms of trade.
protect domestic industry.
But differences are
-import quotas are speedier in effects.
-import quotas have a direct & definite
effects.
-if domestic output does not pick up,
quotas can result in significant rise
in price of imported commodity.
 International Economics

9.4 Import Quotas & Tariffs: A Comparison

But differences are – contd.

-import quotas are fixed by an
executive decree, there is no
legislative discussion, tariffs are
passed in legislature.

- import quotas are discriminatory as

they are fixed for each exporting
country. Tariffs are uniformly
applicable to all countries exporting into
the country.
 International Economics

9.4 Import Quotas & Tariffs: A Comparison

But differences are – contd.

-import quotas, unlike tariffs, do not
bring any revenue to the government ,
unless licenses are auctioned to the
highest bidder.

- import quotas are likely to result in

a domestic monopoly. Not likely with
tariffs because domestic producer
cannot hike price of local commodity
above its cif + duty .
 International Economics

9.4 Import Quotas & Tariffs: A Comparison

It can be concluded that whether the

government should adopt the policy of
import quota fixation or imposing tariffs
depends upon
-a number of factors operating in the
country and
-the objectives aimed at and
-the efficiency with which the both are
implemented.

The End