Trade Policy Concerns: Tariff

Lecture 8
Classifications of Tariff Measures
Which Tariff affects business?
Definition: tax levied on a good when it crosses
a national border
Import tariff: much more common - e.g.
Indias duty on Bangladesh exports, recent
reductions
Export tariff: less common
i. revenue source (cocoa exporters, Ghana,
Ivory Coast) African Franc 210 per kg
ii. enhance scarcity (oil exports, OPEC)
iii. domestic adjustment (garments, China)
Purposes
Protective tariff: designed to reduce the
amount of imports entering a country;
increase sales for domestic producers
Revenue generation: designed to generate
additional funds for domestic government
placed on either exports or imports
Scientific Tariff: cost parity actross
countries
Nuisance Tariff: less than 1 percent
Difference between Bound and Applied Duties
How can the Indo-Japan
CEPA help the Indian
Exporters?
Problems owing to NAFTA?
 Types of Tariff
Examples Specific tariff: fixed monetary amount per unit of the
imported good generally imposed on standardized
Import Specific Ad products, where the value of the dutiable goods may not
Value Duty Valorem be easily observable (e.g. textile).
Equivalent Degree of protection varies inversely with import price.
(%)
Ad valorem tariff fixed percentage of the value of the
$ 25,000 $ 1,000 4 imported good, constant degree of protection during
changing price levels
$ 20,000 $ 1,000 5
customs valuation process of determining the value
of an imported good, simple in theory, but complex in
$ 4,000 $ 1,000 25 practice (e.g. price floor, price ceiling, undervaluation
etc. steel smuggling in the US)
Import Ad Duty o free-on-board (FOB) valuation tariff applied on
Value valorem amount the reported value as the product leaves exporting
Duty (%) country (e.g. US)
o cost-insurance-freight (CIF) valuation tariff
$ 2,000 10 200
applied on the value as the product enters importing
country includes insurance cost and freight
$ 1,800 10 180 charges (e.g. EU)
Compound tariff: combines the elements of specific and
ad valorem tariffs imposed on manufactured products
embodying raw materials specific portion protects the
domestic suppliers of raw materials and ad valorem part
protects the finished product sector.
 National Welfare Arguments
Against Free Trade: Optimum Tariff
Free Trade may lead to welfare level A.
An increase in tariff upto t0 may increase
welfare to B, if there is some form of
National welfare distortion present in the market.
However, further increase may lead to a
prohibitive tariff tp, which will reduce both
B trade and welfare to C (lower than A)
Infant Industry Argument How far valid?
Lobbying by
producers - non-
homogeneity of
A the industry
C looking for
protection
Consumers are
generally
unorganized and
diverse hence
Optimum Prohibitive Tariff rate successful
tariff, to lobbying becomes
tariff rate, tp
difficult.
Which sectors are more likely to get
protection cover?
 The Anatomy of Protectionism
Demand Factors
Greater comparative disadvantage: the
segment of the industry which is most cost-
inefficient looks for greater protection
Lesser import penetration: if the imported
inputs are not important in the production
process, then the players are motivated to
seek greater protection from the
government, e.g. Indian textile exports?
Greater domestic concentration: if only a
limited number of players dominate the
domestic market, then the potential threat
for the domestic sector is much greater, e.g.
chemical and petrochemical industry in India?
Lesser export dependence: if exports to
foreign market is a major proportion of total
revenue, then not supportive of barriers as
the industry fears retaliatory actions, e.g.
Indian IT-enabled service exports?
Supply Factors
Higher cost to society: the higher is the level
of protection, the higher is the loss in
consumer welfare and inefficiency of
production low economies of scale and
lesser incentives for technological innovation
the government always wants to ensure
minimum disturbance, e.g., palm oil in India?
Greater political importance: representation
in the lawmaking forum ability to influence
decision-making process; e.g. Iron and Steel,
primary products in the US, agriculture in
India?
Higher adjustment costs: if the imports lead
to too much of domestic adjustment, then
the government steps in and supply
protection (e.g. tariff, subsidy, safeguard
measures), e.g. rising anti-dumping
investigations in India?
Greater public sympathy: if the share of
employment of a particular sector in overall
workforce is too high, motivating public
sentiment becomes easier, e.g. textile sector
in India?
Tariff and International Business:
Some Issues and Observations
1. In which regions tariff continue to pose a problem?

Source: WTO
 2. Average Applied Tariff Rates: Sector-Country
Product Categories Bangladesh China EU India US
Animal products 19.3 14.8 23.2 31.1 2.2
Dairy products 23.5 12.0 49.4 33.5 17.5
Fruits, vegetables, plants 20.3 14.8 11.3 29.4 4.7
Coffee, tea 21.8 14.7 6.6 56.3 3.3
Cereals and preparations 15.0 24.2 17.5 31.3 3.0
Oilseed, fat and oils 10.7 10.9 5.5 35.1 7.3
Sugar and confectionary 22.0 27.4 27.5 35.9 14.8
Beverages and tobacco 25.0 22.9 19.0 68.6 18.6
Cotton 4.9 15.2 0.0 6.0 4.8
Fish and fish products 23.4 10.7 11.8 29.9 0.8
Chemicals 11.6 6.6 4.6 7.9 2.8
Wood, paper 16.4 4.4 0.9 9.0 0.5
Textiles 20.1 9.6 6.6 11.8 7.9
Clothing 24.2 16.0 11.5 12.3 11.6
Leather, footwear 15.4 13.4 4.2 10.1 3.8
Non-Electrical machinery 5.8 7.8 1.9 7.1 1.2
Electrical machinery 13.7 8.0 2.8 7.2 1.7
Transport equipments 13.1 11.5 4.3 19.4 3.1

Source: World Tariff Profiles

3A. Non-Ad Valorem Tariff in the US: Specific and Compound
HS Code Description Tariff Rate

290545 Glycerol [0.5 cents/kg]

350211 Egg albumin, dried "e.g. in sheets, scales, flakes, powder" [47.6 cents/kg]

420232 Wallets, purses, key-pouches, cigarette-cases, tobacco- [12.1 cents/kg +

pouches and similar articles carried in the pocket or handbag, 4.6%]
with outer surface of plastic sheeting or
520300 Cotton, carded or combed [31.4 cents/kg]

540753 Woven fabrics of yarn containing >= 85% by weight of [18.8 cents/kg
textured polyester filaments, incl. monofilament of >= 67 + 17.4%]
decitex and a maximum diameter of <= 1 mm
610190 Overcoats, car coats, capes, cloaks, anoraks, incl. ski jackets, [61.7 cents/kg
windcheaters, wind-jackets and similar articles of textile + 16%]
materials, for men or boys, knitted or
620990 Babies'' garments and clothing accessories of textile [31.8 cents/kg
materials (excl. of cotton or synthetic fibres, knitted or + 14.4%]
crocheted and hats)
650400 Hats and other headgear, plaited or made by assembling strips [94 cents/doz.
of any material, whether or not lined or trimmed (excl. + 4.6%]
headgear for animals, and toy and carnival

Source: US Tariff Schedule (WTO)

3B. Non-Ad Valorem Tariff in India: Basis of Selection
3C. Indian Tariff Scenario: Comparing Non Ad Valorem Bound
and Applied Tariffs

HS Code Bound Rate Applied Rate

511111 [25% or Rs. 115/SQM whichever is higher] [12.5% or Rs. 115 per sqm. whichever is higher]

520839 [25% or Rs.150/Kg whichever is higher] [12.5%or Rs. 150/Kg whichever is higher]

540751 [30% or Rs. 11/SQM whichever is higher] [12.5% or Rs. 11 per sqm whichever is higher]

551110 [20% or Rs. 31/Kg whichever is higher] [12.5% or Rs. 31 per kg whichever is higher]

570232 [35% or Rs. 105/SQM whichever is higher] [12.5% or Rs. 105 per sqm whichever is higher]

580121 [35% or Rs. 80/SQM whichever is higher] [12.5% or Rs. 80 per sqm whichever is higher]

600192 [25% or Rs. 100/Kg whichever is higer] [12.5% or Rs. 100 per kg whichever is higher]

610210 [40% or Rs. 595/Pc whichever is higher] [12.5% or Rs. 595 per pc whichever is higher]

620319 [40% or Rs. 1110/Pc whichever is higher] [12.5% or Rs. 1110 per pc whichever is higher]

630221 [35% or Rs. 108/Kg whichever is higher] [12.5% or Rs. 108 per kg whichever is higher]

Source: Indias Tariff Profile (WTO)

How severe is the extent of protection in the Indian context?

 4. Indian Tariff Scenario: Unbound
HS Code Description Applied duty (%)
Shrimps and prawns, whether in shell or not, live, dried,
030623 salted or in brine 30.0
300420 Medicaments containing antibiotics 10.0
310290 Mineral or chemical nitrogen fertilizers 7.5
321390 Artist's, student's or signboard painter's colours 10.0
360610 Liquid or liquefied-gas fuels 10.0
392350 Stoppers, lids, caps and other closures, of plastics 10.0
401390 Inner tubes, of rubber 10.0
420232 Wallets, purses, key-pouches etc. 10.0
441820 Doors and their frames and thresholds, of wood 10.0
481720 Letter cards, plain postcards, correspondence cards etc. 10.0
620910 Babies' garments and clothing of wool 10.0
701332 Glassware for table or kitchen purposes 10.0
711311 Articles of jewellery and parts thereof 10.0
731814 Self-tapping screws, of iron or steel 10.0
Turntables "record-decks", without automatic record-
851939 changing mechanism 10.0
Motor-cycles, incl. mopeds, with reciprocating internal
combustion piston engine of a cylinder capacity > 500 cm
871140 but <= 800 cm 100.0
How to know the unbound tariff
Source: Indias Tariff Profile (WTO)
schedules of trade partners?
 5. Tariff Water and Neo-Protectionism:
Average Applied Tariff Scenario (%)
Product Category EU India
2006 2009 2013 2006 2009 2013
Animal products 25.9 23.2 20.0 31.6 33.1 31.1
Dairy products 62.4 49.4 52.8 34.5 33.7 33.5
Fruits, vegetables, plants 11.6 11.3 10.7 30.8 30.4 30.8
Coffee, tea 6.9 6.6 6.2 55.9 56.3 56.3
Cereals and preparations 19.8 17.5 17.1 31.1 32.2 31.3
Oilseed, fat and oils 6.0 5.5 6.1 48.8 18.2 37.4
Sugar and confectionary 29.8 27.5 29.7 34.4 34.4 35.9
Beverages and tobacco 20.0 19.0 20.8 63.3 70.8 69.1
Cotton 0.0 0.0 0.0 17.0 12.0 6.0
Fish and fish products 10.6 11.8 11.8 29.6 29.8 29.9
Chemicals 3.8 4.6 4.6 8.0 7.9 7.8
Wood, paper 0.9 0.9 1.0 9.1 9.1 9.0
Textiles 6.6 6.6 6.6 20.9 13.6 12.2
Clothing 11.5 11.5 11.5 22.2 16.1 13.0
Leather, footwear 4.1 4.2 4.2 10.1 10.2 10.2
Non-Electrical machinery 1.7 1.9 1.9 7.0 7.3 7.1
Electrical machinery 2.6 2.8 2.8 6.6 7.2 7.3
Transport equipments 4.1 4.3 4.3 20.8 20.7 21.7

Source: Indias Tariff Profile (WTO)

 6A. Effective Rate of Protection
Nominal tariff rate: based on tariff applied to value of finished
product
Effective tariff rate: based on tariff applied to finished product and
imported inputs shows the total increase in domestic productive
activities (value added) that an existing tariff structure makes
possible
ERP = (n ab) / (1 - a), where
n = nominal tariff rate on final product,
a = ratio of imported input to total value of the product,
b = nominal tariff rate on imported input.
Example: A country imposes a 10 % tariff on a product costing $ 100. $ 80 is the value
of imported input for that purpose. Initially the inputs enters the country duty free.
Now suppose tariff changes. Then ERP becomes:
Tariff on b Tariff on Final Share of inputs in ERP
imported Product = 10 final product (a)
Inputs (%) percent (n)

0.0 0 0.1 0.8 50

2.0 0.02 0.1 0.8 42
4.0 0.04 0.1 0.8 34
5.0 0.05 0.1 0.8 30
7.5 0.075 0.1 0.8 20
10.0 0.1 0.1 0.8 10
 ERP: Policy Implication
Foreign Radio Cost ($) Domestic Cost ($)
Import Competing Radio
Component parts 80 Component parts 80
Assembly activity 20 Assembly activity 30
(value added) (value added)
Nominal tariff 10
Import price 110 Domestic Price 110

Foreign radio (priced $100) is imported in the country with a

tariff rate of 10 percent.
However, imported components enter the country duty-free.
Under free trade, the domestic producers need to keep
assembly activities at $ 20. However, the 10 percent tariff
enables them to get away with an inefficient assembly cost
structure at $ 30.
The assembly cost is higher by $ 10, which is 50 percent
increment over free trade cost. This is the ERP in this case.
By formula, ERP = (0.1 0.8*0) / (1 0.8) = 0.1/0.2 = 0.5 = 50
percent
The effective protection is 5 times the nominal rate.
 ERP: Global Scenario
Nominal and Effective Tariff Rates, US (%)

Product Nominal Effective

rate rate
The degree of ERP
Wearing apparel 27.8 50.6 increases as the value
added by the domestic
Textiles 14.4 28.3 producers decline.
Glass products 10.7 16.9 Higher tariff imposed on
the inputs used in the
Mineral products 9.1 15.9
production process reduces
Footwear 8.8 13.1 ERP.
Furniture 8.1 12.3 So, are Indian exports
facing low nominal tariff
Miscellaneous 7.8 11.1 but high ERP abroad?
manufactures

Metal products 7.5 12.7

Electrical machinery 6.6 9.4

Conclusion: When material inputs or intermediate products enter a

country at a very low rate of duty while the final imported commodity
is protected by a high rate of duty, it results into a high ERP for 20
domestic producers.
 6B. Tariff Escalation
Greater protection (higher tariffs) on intermediate and finished
goods and lower tariffs on raw materials
Perverse incentive for developing nations to expand production of
raw materials?
Disincentive for developing nations to compete in market for
finished goods significant entry barrier

Is tariff
escalation a
developed
country
phenomenon?
 Tariff Escalation in the US ..
HS Code Description Tariff Rate (%)

410150 Whole raw hides and skins of bovine "incl. buffalo" or equine 2.3
animals, whether or not dehaired or split, of a weight per skin
> 16 kg, fresh, or salted, dried,
410210 Raw skins of sheep or lambs, with wool on, fresh or salted, 0.7
dried, limed, pickled or otherwise preserved (excl. those of
Astrakhan, Caracul, Persian, Broadtail or
410221 Raw skins of sheep or lambs, without wool on, pickled, whether 0.0
or not split
420239 Wallets, purses, key-cases, cigarette-cases, tobacco-pouches 9.1
and similar articles of a kind normally carried in the pocket or
handbag, with outer surface of
521112 Woven fabrics of cotton, containing predominantly, but < 85% 7.7
cotton by weight, mixed principally or solely with man-made
fibres and weighing > 200 g/m, in
610332 Men''s or boys'' jackets and blazers of cotton, knitted or 13.5
crocheted (excl. wind-jackets and similar articles)
720810 Flat-rolled products of iron or non-alloy steel, of a width of >= 0.0
600 mm, in coils, simply hot-rolled, not clad, plated or coated,
with patterns in relief directly due
730719 Cast tube or pipe fittings of iron or steel (excl. products of 5.9
non-malleable cast iron)
22
Tariff Escalation in India? US Tariff Schedule (WTO)
 Inverted Duty Structure in India
HS Code Description Import Policy Basic MFN Duty (%) 2015

Effective
Customs

Excise
Central
Waste and scrap of cast iron/
72041000 alloy steel Free 15 2.5 12.5
Waste and scrap of tinned Iron/
72043000 steel/other waste and Scrap Free 15 2.5 12.5

72045000 Remelting scrap ingots Free 15 2.5 12.5

74040012 Copper scrap and waste (all type) Free 5 5 12.5

74040022 Brass scrap and waste (all type) Free 5 5 12.5

74040023 Nickel silver scrap 5 5 12.5

Aluminium scrap and waste (all
76020010 type) Free 5 2.5 12.5

78020010 Lead scrap and waste (all type) Free 5 5 12.5

79020010 Zinc scrap and waste (all type) Free 5 5 12.5

81042010 Magnesium scrap Free 5 5 12.5

81053000 Cobalt waste and scrap Restricted 5 5 12.5

Source: Export Import Handbook

 7. Offshore Assembly Provision (OAP)
Outsourcing aspects of production process occur in another country
Reasons: motivation to take advantage of low cost, labor intensive products (e.g.
electronic components made in Japan will be sent to Cambodia to assemble them
into PC sets).
Other reasons: tariff-jumping motive, obtaining specific raw materials,
specialized components etc.
Beneficial for the economy of outsourcing developed country as well leads to
employment and output growth in key activities.
OAP tariffs applies only to portion of production occurring in another country
(e.g. motor vehicles, office machinery etc.)
Benefits: reduces effective tariff rate for domestic consumers ($ 330 and $
310), incentive for foreign producers to use local components in production
Costs: detrimental to local workers who also produce the same finished goods
Normal Import Value ($) Import under OAP Value ($)
Component parts from Country 200 Component parts from Country 200
A to country B A
Local parts / services in 100 Local parts / services in 100
Country B (value added) Country B (value added)

Total import value in country A 300 Total import value in country A 300
Nominal tariff rate (%) 10 Nominal tariff rate (%) only on 10
outsourced part
Import price 330 Import price 310
Under OAP, the effective tariff is only 3.3 percent, good for consumers
 8. Dodging Import Tariffs
Basic Instinct: importers often try to ensure a lower tariff on
imports, be it semi-processed or final products
Tariff avoidance: legal method of reducing or eliminating the
amount paid in tariffs
Brazilian raw sugar shipped to Caribbean and refined there into ethanol
then imported to the U.S. duty free
Under Indo-Lanka FTA, copper ore was exported to Sri Lanka and
processed copper product was imported in India duty free
Ford converting 5-passenger wagons imported from Turkey to 2-seat cargo
vans in US, as tariff on the two categories are 2.5 and 25 percent
respectively.
o Tariff evasion: illegal means of reducing or eliminating tariffs
False reclassification of products steel import from Ukraine in US; import
of metal waste and scrap in several countries
Falsification of country of origin suppose under AFTA, import of a leather
product from Nepal is free, while the same from China is not. An importer
might try that route.
Altering composition of product itself often observed for chemical, steel
products, fabrics etc., as tariff varies with different composition

Postponing Import Tariffs: No duty if raw material / parts

and components processed and exported from EPZ / FTZ
How to use Consumer and Producer
Surplus concepts for understanding
Welfare Effects of Trade?
 Consumer Surplus: Concept-Geometry
Consumer surplus additional benefit obtained by
the buyer of a good
Price, P difference between the maximum that the buyer
is willing to pay and the actual price
area below demand and above price

At Price P1, CS = a
At Price P2, CS = a + b
a If price falls, the consumers
are motivated to demand more
and CS increases.
P 1
If import tariff t is increased,
t b the price for the consumers
P 2
increases from P2 to P1 and
there is loss of CS.
If price increases from P2 to P1
due to the tariff increase, total
D loss in CS is b.

Q 1 Q 2 Quantity, Q
 Producer Surplus: Concept-Geometry
Producer Surplus additional benefit obtained by
the seller of a good
difference between the minimum that the seller is
Price, P willing to accept and the actual price
area above supply and below price
S
At Price P1, PS = c
At Price P2, PS = c + d
P 2
If import tariff t is imposed,
t d the price increase from P1 to
P 1
P2 motivates producers to
c produce more and there is
gain of PS.
If price increases from P1 to
P2 by tariff increase, gain in
PS is d.

Q 1 Q 2
Quantity, Q
How do we distinguish Small and large
Countries in International Trade?
 Small Country: What it means?
A: Normal Scenario B: Supply Shock
S S

P* E P* E

D D

C: Demand Shock Suppose the demand and supply conditions

represent world wheat market.
So, Small
S A: Initially P* denotes the equilibrium
Country is a
price.
Price-Taker
B: Suppose there is a crop failure in India
and it decides not to export wheat.
P* E However, since India is a small player,
world supply will not be greatly affected
and world price will remain almost
unchanged at P*.
D C: Similarly, if demand increases in
Jamaica, the D and S curves will not shift.
 Large Country: What it means?
A: Normal Scenario B: Supply Shock
S S
S

P1
P* E P* E

D D

C: Demand Shock Suppose the demand and supply

conditions represent world petroleum
So, Large
S market.
Country is a
A: Initially P* denotes the equilibrium
Price-Maker
price.
B: Suppose OPEC decides to cut
P* E production of petroleum. Then global
P1 supply will shrink to S and world price
will increase to P1.
C: Similarly, if there is recession in
D the US and EU, demand will shift to D
D
and world price will fall to P1.
How Tariff Imposition will work out
for a Small Nation?
 Tariff Welfare Effects Small Nation
In the pre-Trade scenario, the Consider the automobile market.
domestic market is represented
by Sd and Dd curves.
Pre-Trade
Domestic market equilibrium is
reached at E (US $ 9,500 and
50 units).
U.S. consumer surplus is area in
red.
U.S. producer surplus is area in
green.
The world price is Sd+w, which
signifies that home is less
efficient in production of autos.
Now suppose the country
adopts the policy of Free Trade
and the tariff is reduced to
zero.
 Tariff Welfare Effects Small Nation
Free-Trade equilibrium is
reached at F, where home
demands 80 units Free-Trade
(intersection of Dd and
Sd+w), produces 20 units
(intersection of Dd and
Sd+w) and imports 60 units.
Consumer surplus then is
represented by areas a, b,
c, d, e, f and g.
Producer surplus however
decreases by areas a and e.
The overall increase in
welfare is b, c, d and f.
Since the producers are
hurt, they might lobby to
the government.

So, free trade is the best policy for small countries

 Tariff Welfare Effects Small Nation
Now suppose, the Tariff Intervention
country goes for a
$1000 Tariff on imports.
The resulting
developments are noted
in the diagram.
c = revenue effect = lost
consumer surplus, now
government revenue.
a = redistributive effect
= shift from consumer to
producer surplus
b + d = deadweight loss
= benefits lost to all
parties
b = protective effect
d = consumption effect

b happens because resources which are less adaptable to auto production

are also being diverted for that purpose.
d happens because consumption falls owing to import-augmented price
increase.
How Tariff Imposition will work out
for a Large Nation?
 Tariff Welfare Effects Large Nation
Pre-Trade
Here foreign supply
price is not a fixed
constant, but
depends on price.
Before Trade:
E is the equilibrium
point where Sd
intersects with Dd.
U.S. consumer
surplus is area in
red
U.S. producer
surplus is area in
green.
 Tariff Welfare Effects Large Nation
With Free Trade: Free-Trade
F is the equilibrium point
where world price Sd + w
intersects with Dd.
Consumer surplus increases
substantially, and is denoted
by the red region.
Producer surplus decreases
and is denoted by the green
region.
The overall increase in
welfare is b, c, d and the
triangle above.
Total demand = 110 units
Domestic production = 30
units
Imports = 80 units
 Whats different with Large Countries?
Effect of increases in US Tariffs on the world prices of imported goods
Product Tariff (or equivalent) Increase in US Price Decrease in World
Price
Ball bearings 11.0 10.2 0.8
Chemicals 9.0 6.5 2.5
Jewelry 9.0 5.4 3.6
Orange juice 30.0 21.7 8.3
Glassware 11.0 7.3 3.7
Luggage 16.5 11.0 5.5
Resins 12.0 5.4 6.6
Footwear 20.0 16.1 3.9
Lumber 6.5 4.1 2.4

Suppose US When a country imposes tariff, the price of the product in the import
impose tariff on market increase, as a result of which demand falls.
Indian exports Hence exporting countries try to reduce their price so as to partially nullify
the effect of tariff.
TOTUS = PX / PM
With the imposition of tariff, Indian players will reduce PM, as a result of
which US TOT increase.
Suppose Indias export price is 100. A 10 percent tariff increase is imposed.
However price is reduced to 98, and the post-tariff price would be 107.8,
not 110. So, consumer surplus suffers but not to the fullest extent of tariff.
 Tariff Welfare Effects Large Nation
Now suppose a specific duty of
$ 1000 is imposed on imports. Tariff Intervention
However, the foreign suppliers
reduce their supply price by $
200.
So, home consumers pay only $
800 extra.
CS falls by a + b + c + d.
c + e = revenue effect =
consumer surplus now
government revenue.
a = redistributive effect =
shift from consumer to
producer surplus
b + d = deadweight loss =
benefits lost to all parties
b = protective effect
d = consumption effect
 Tariff Welfare Effects Large Nation
Revenue Effect:
Optimum tariff, where e > (b + d) would be maximum
In this case there are two
separate portions:
c = domestic revenue
effect = tariff revenue
borne by the domestic
consumers goes to
government
e = terms-of-trade
effect = redistribution of
income from foreign nation
because of reduction in
import price
area e > (b + d) leads to
Greater domestic welfare
area e < (b + d) leads to
Lower domestic welfare

What happens
in US then?

Failure: Beggar-Thy-Neighbour Policy

How Tariff Imposition can be analyzed
through Offer Curve?
 Trade Equilibrium in Terms of Offer Curve:
Period Zero

Homes imports of food, DF QF Let foreign

Foreigns exports of food, Q *F D *F countrys offer
M curve be OF
F Home countrys
E offer curve be
Y OM
E is the initial
equilibrium point

O
X
Homes exports of cloth, QC DC
Foreigns imports of cloth, D *C Q *C
 Effect of Tariff on the Terms of Trade: Period 1

Initial equilibrium
Home imports of food, DF - QF Slope = (P * /P * )1 point is 1.
C F
Foreign exports of food, Q *F D *F Suppose home
M 1
T 1 imposes a tariff
Slope = (P *
C /P * )2
F on imports. Then
T 2 the offer curve
M 2 F
shifts to OM2.
1
If home is a small
3 country, TOT
remains at OT1.
The new
equilibrium point
is 2.
If home is a large
2 country, its TOT
improves to OT2
and the new
equilibrium is 3.

O Home exports of cloth, QC - DC

Foreign imports of cloth, D *M - Q *M
 Effect of Beggar-Thy-Neighbour Policy on Trade:
Period 2

Home imports of food, DF - QF Slope = (P * /P * )1

C F Now if the
Foreign exports of food, Q *F D *F
M 1 foreign country
Slope = (P * /P * )2 T 1
also imposes a
C F
tariff, its offer
T 2
M 2 F 1
curve will come
1 down to OF2, and
the new
3 equilibrium point
will be at 4.
TOT will improve
4 for Foreign
F 2
country and
2 worsen for home.
As a result, global
trade flows will
suffer.

O Home exports of cloth, QC - DC

Foreign imports of cloth, D *M - Q *M
 Welfare effect of Tariff: Summary
Policy \ Small Country
Country Group
No Trade Worse off, as inputs are
utilized both by the
comparatively efficient and
inefficient industry,
efficiency loss
Free Trade Better off, welfare increases
as production of the relatively
inefficient sector declines and
vice versa
Imposition of Worsens welfare as tariff
Tariff increases the price for the
domestic consumers and users
of imported inputs, without
any decline in world price
What is the Indian scenario?
What is the US scenario?
Large Country
Worse off, as inputs are
utilized both by the
comparatively efficient and
inefficient industry,
efficiency loss
Better off, welfare
increases as production of
the relatively inefficient
sector declines and vice
versa
Ambiguous, welfare worsens
as consumer surplus
declines, but TOT improves
as world price declines. The
overall gain depends on the
relative strength of the two
effects.
 Tariffs and Welfare: Poorer Sections
Product Tariff Rate
The responsibility of the governments is
Drinking glasses
to ensure that the welfare costs of
30 cents or less 30.4 tariffs are shared uniformly.
$ 5 or more 5.0 Tariffs often applied to low price
Leaded glass 3.0 products which represent large share of
Handbags budgets of low-income households
Plastic-sided 16.8 Regressive - poor pay greater tariffs in
Leather, under $ 20 10.0
percentage terms
High end domestic producers compete
Reptile leather 5.3
based on prestige and quality rather than
Mens knitted shirts
price so these producers do not lobby as
Synthetic fibre 32.5 much for greater protection from
Cotton 20.0 imports
Silk 1.9 As per GATT and WTO discussions,
Womens Underwear tariffs are already near zero level for
Man-made fibre 16.2
airplanes, semiconductors, computers,
medical equipment, medicines etc. For
Cotton 11.3
developed and developing countries. LDCs
Silk 2.4
have also reduced their tariff over the
Since margin is lower, period.
here domestic industry However, low-tech manufacturing
plays a significantly product groups like leather, textile,
active role in seeking garments, chemical etc. often face tariff
higher protection. and dumping allegation.
Implication of Tariff burden on
Exporters
 Tariff Burdens on Exporters
Cost of inputs: tariffs increase
price of imported raw materials,
thus increasing the price of
manufacturing using these
materials. Since the global
market is highly competitive, the
profit margin of domestic firms
fall (if price remains constant),
or they lose competitiveness (if
price is increased).
Cost of living: tariffs lead to
higher prices for domestic
consumers, eventually leading to
higher wages for the workers.
Hence competitiveness declines.
International repercussions:
tariffs decrease exports from
If tariff is imposed on
other countries in home market,
imported steel, then industries decreasing their income. As a
using the same as inputs are result foreign countries are left
forced to charge a higher price, with lesser funds and ability to
sell lower quantities, and earn purchase home exports.
lower profits.
 Case: US Steel Industry
US steel industry was global leader in
President Bushs Steel Trade Remedy
1950s
Program of 2002-03: Selected Products
In 1960s, foreign players started
exporting significantly in the US
Products Tariff Rates
Internal Problems: outdated technology,
Year Year high fixed costs, enormous capacity, legacy
1 2
costs (pensions, healthcare etc.)
Semi-Finished Slab 30 24 External Problems: export from South
Cold-rolled sheet, coated 30 24 Korean minimills that directly convert
sheet scrap into finished steel products
Hot-rolled bar 30 24 Response: allegation of dumping and
subsidization of foreign steel industries,
Cold-finished bar 30 24
confirmed by USITC.
Reber 15 12 External actions: increase in tariff and
Welded tubular products 15 12 dumping duties.
Internal actions: mergers, renegotiation of
Carbon and alloy flanges 13 12 labour contracts etc.
Setback: WTO ruled the tariff increase
Stainless steel bar 15 12
was incompatible with realty as increase
takes place four years after surge in
imports.
The implications? Tariff cover reduction from 2004 onwards
 Did US Steel Exports increase as a result of
AD Duty and Tariff Increase?
US has been a major user of Key Players 1980 1990 2000 2010 2012 2015
AD provisions on Base EU (27) - - 47.0 38.5 36.7 36.3
metals ( including Iron and
Japan 20.1 11.8 10.4 10.0 9.0 7.9
Steel) exports over 1995-
2012, but its share in global China 0.3 1.2 3.1 9.4 11.1 16.7
iron and steel exports has South Korea 2.2 3.4 4.7 5.8 6.2 6.1
not greatly improved. US 4.2 3.3 4.4 4.1 4.3 4.2

300 287 India 0.1 0.2 0.9 3.5 2.2 2.2

250 Initiations Measures Brazil 1.1 3.4 2.5 2.1 2.3 2.5
187
South Africa 1.6 2.0 1.9 1.8 1.3 0.9
200 171
138
Canada 2.3 1.9 2.2 1.7 1.6 1.7
150
111
100
90 89 83
65
83 80 Source: Constructed
60
46 45 45
34
51 51 from International
50
Trade Statistics data
0
US

India
EU

Canada

Argentina

Mexico
Brazil
Australia

South Africa

Source: Constructed from WTO AD Gateway

What has been the extent of tariff
reform across countries?
 China: NAMA Tariff Scenario
(Percentage of Tariff Lines and Import Value)
Tariff Applied Import Applied Import Applied Import
Range Value Value Value
2012 2011 2013 2012 2015 2014

Duty Free 7.8 46.9 7.7 54.3 6.9 49.2

05 19.7 19.1 19.7 16.4 18.8 17.9

5 10 46.7 27.6 46.7 23.5 47.0 25.7

10 15 14.2 2.6 14.2 2.2 15.0 2.3

15 25 10.4 3.6 10.4 3.4 11.1 4.8

25 50 1.1 0.3 1.2 0.3 1.2 0.1

50 -100 0.0 0.0 0.0 0.0 0.0 0.0

Above 100 0.0 0.0 0.0 0.0 0.0 0.0

Source: World Source:

Tariff Profile
World (2012,
Tariff 2013
Profile
and(2012)
2016)
 EU: NAMA Tariff Scenario
(Percentage of Tariff Lines and Import Value)
Tariff Applied Import Applied Import Applied Import
Range Value Value Value
2012 2011 2013 2012 2015 2014

Duty Free 26.7 58.8 26.1 59.8 26.5 63.1

05 38.6 23.5 37.7 23.3 37.5 20.0

5 10 27.1 10.9 27.3 10.6 27.1 10.0

10 15 6.7 6.0 7.3 5.5 7.3 5.9

15 25 0.9 0.9 1,5 0.8 1.5 1.0

25 50 0.0 0.0 0.1 0.0 0.1 0.0

50 -100 0.0 0.0 0.0 0.0 0.0 0.0

Above 100 0.0 0.0 0.0 0.0 0.0 0.0

Source: World Tariff Profile (2012, 2013 and 2016)

 India: NAMA Tariff Scenario
(Percentage of Tariff Lines and Import Value)
Tariff Range Applied Import Applied Import Applied Import
Value Value Value
2012 2011 2013 2012 2015 2014

Duty Free 3.1 19.2 2.6 14.1 2.5 35.0

05 14.3 41.0 11.5 46.3 9.8 20.6

5 10 74.8 39.3 75.9 38.9 77.7 43.8

10 15 1.0 0.0 1.1 0.0 1.4 0.2

15 25 1.9 0.2 2.1 0.3 1.7 0.3

25 50 4.1 0.1 6.1 0.1 5.8 0.1

50 -100 0.7 0.2 0.6 0.2 0.4 0.1

Above 100 0.1 0.0 0.1 0.0 0.0 0.0

Source: World Tariff Profile (2012, 2013 and 2016)

 US: NAMA Tariff Scenario
(Percentage of Tariff Lines and Import Value)
Tariff Range Applied Import Applied Import Applied Import
Value Value Value
2012 2011 2013 2012 2015 2014

Duty Free 47.6 50.3 48.6 50.5 48.4 51.0

05 26.8 38.4 26.3 38.5 26.4 37.3

5 10 17.0 6.4 16.7 6.3 16.7 6.5

10 15 4.9 0.9 4.7 0.9 4.8 0.9

15 25 1.9 3.3 1.8 3.1 1.8 3.3

25 50 0.5 0.7 0.5 0.7 0.5 0.8

50 -100 0.0 0.0 0.0 0.0 0.0 0.0

Above 100 0.0 0.0 0.0 0.0 0.0 0.0

Source: World Source:

Tariff Profile
World (2012,
Tariff 2013
Profile
and(2012)
2016)