Exam 4: Tariffs

An import tariff will worsen the terms of trade for a "small" country but improve the terms of trade for a "large" country.

How can tariffs be justified?

Tariffs are $\underline { \text { not } }$ defended on the ground that they:

Exhibit 4.2 In the absence of international trade, assume that the equilibrium price and quantity of motorcycles in Canada is $14,000 and 10 units respectively. Assuming that Canada is a small country that is unable to affect the world price of motorcycles, suppose its market is opened to international trade. As a result, the price of motorcycles falls to $12,000 and the total quantity demanded rises to 14 units; out of this total, 6 units are produced in Canada while 8 units are imported. Now assume that the Canadian government levies an import tariff of $1,000 on motorcycles. -Refer to Exhibit 4.2. All of the import tariff is shifted to the Canadian consumer via a higher price of motorcycles.

A specific tariff is expressed as a fixed percentage of the total value of an imported product.

Which type of tariff is not used by the American government?

The redistribution effect of an import tariff is the transfer of income from the domestic:

Although an import tariff provides the domestic government additional tax revenue, it benefits domestic consumers at the expense of domestic producers.

A limitation of a specific tariff is that it provides a constant level of protection for domestic commodities regardless of fluctuations in their prices over time.

Changes in a "large" country's economic conditions or trade policies can affect the terms at which it trades with other countries.

To protect domestic producers from foreign competition, the U.S. government levies both import tariffs and export tariffs.

Suppose that the tariff on imported steel is 40 percent, the tariff on imported iron ore is 20 percent, and 30 percent of the cost of producing a ton of steel consists of the iron ore it contains. The effective rate of protection of steel is approximately 49 percent.

A tariff on steel imports tends to improve the competitiveness of domestic automobile companies.

Assume that the United States imports VCRs from South Korea at a price of $200 per unit and that these VCRs are subject to an import tariff of 20 percent. Also assume that U.S. components are used in the VCRs assembled by South Korea and that these components have a value of $100. Under the Offshore Assembly Provision of U.S. tariff policy, the price of an imported VCR to the U.S. consumer after the tariff has been levied is $220.

As long as it is assumed that a nation accounts for a negligible portion of international trade, its levying an import tariff necessarily increases its overall welfare.

What happens to effective protection when the value added by the domestic producer declines?

Figure 4.4 Market for Gasoline in a Small Nation -Figure 4.4 represents the market for gasoline in a small nation. The free trade world price of gasoline is $3.50. Suppose this small nation imposes a tariff on gasoline of $.50 per gallon. The change in producer surplus would be

A tax of 15 percent per imported item would be an example of:

For a "large" country, a tariff on an imported product may be partially absorbed by the domestic consumer via a higher purchase price and partially absorbed by the foreign producer via a lower export price.

There is widespread agreement among economists that import tariffs increase overall employment in the levying country.