Chapter 13 The Instruments of Trade Policy Mc

Chapter 13 The Instruments of Trade Policy Mc. Graw-Hill/Irwin Copyright © 2010 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Learning Objectives § Describe the different tax instruments employed to influence imports. § Discuss policies used to affect exports. § Explain the problems encountered in measuring the presence of protection. § Summarize the different nontariff policies used to restrict trade. 13 -2

Tariffs in General § Tariffs are simply taxes a country places on its imports. § Purpose of tariffs: • to protect domestic (import-competing) industries • to raise revenue for the government § There are two sorts of tariffs: specific and ad valorem. 13 -3

Specific Tariffs § Specific tariffs involve charging a tax per physical unit imported. § For example, the tariff on frozen orange juice is 7. 85¢ per liter. § Specific tariffs may be easier to administer. § Specific tariffs are less likely to maintain the same degree of protection in times of high inflation. 13 -4

Ad Valorem Tariffs § Ad valorem tariffs involve charging a tax as a percentage of the value of the good. § For example, the tariff on golf clubs is 4. 4%. § Ad valorem tariffs may be more complicated to administer than specific tariffs, but do hold their protective value in the face of inflation. 13 -5

Preferential Duties and the Generalized System of Preferences (GSP) § Preferential duties: tariff rates vary according to product’s geographic source. § The GSP involves developing countries paying lower (or zero) tariffs when exporting to the developed world. 13 -6

Permanent Normal Trade Relations Status § PNTR status is a way to achieve non-discrimination in trade. § If the U. S. negotiates a lower tariff with a PNTR country, U. S. tariffs fall for all countries with which the U. S. has a PNTR treaty. § This is also called multilateralism (and once was called ‘most favored nation’ status). 13 -7

Offshore Assembly Provisions § With OAPs, the tariff applies only to the foreign value added. § For example, if there is a tariff on computers, the tariff is not applied to the value of domestic-made components. 13 -8

Measuring Tariffs § How can we tell how much tariff protection a country has on average? § This is sometimes referred to as the “height” of tariffs. § There are two ways to measure this height: • Unweighted average • Weighted average 13 -9

Unweighted Tariffs § Suppose there are 3 imported goods. • Good A has a 30% tariff • Good B has a 40% tariff • Good C has a 10% tariff § The unweighted average is the simple average of the three: (30%+40%+10%)/3 = 26. 7% § Unfortunately, this doesn’t account for the fact that the quantities of each good that are imported may differ. 13 -10

Weighted Tariffs § Suppose there are 3 imported goods. • Good A has a 30% tariff and 200 units are imported • Good B has a 40% tariff and 100 units are imported • Good C has a 10% tariff and 400 units are imported § The weighted average is the simple average of the three: [(30%)(200)+(40%)(100)+(10%)(400)]/ (200+100+400) = 20% 13 -11

Nominal and Effective Rates of Protection § Nominal tariff rates apply only to final products. § Effective tariff rates take into account not only tariffs on final products, but also those on inputs into the final product. § Basic idea: a tariff on an intermediate good (e. g. , steel) raises the cost of many final goods (cars); this reduces the protection afforded to auto makers. 13 -12

Nominal Rate of Protection (NRP) § First consider the nominal rate of protection (NRP). § NRP = (PDt - PDFT)/ PDFT § NRP is always equal to the tariff on the final product. 13 -13

Effective Rate of Protection (ERP) § First, let’s define value added ØVA = price of good - price of inputs. § Now we can define effective rate of protection ØERP = (VADt - VADFT)/VADFT. 13 -14

ERP § When tariffs on inputs > tariffs on final products, ERP < NRP. § When tariffs on inputs < tariffs on final products, ERP > NRP. § When tariffs on inputs = tariffs on final products, ERP = NRP. 13 -15

ERP: The Bottom Line § ERP gives an indication of the effects of the whole tariff structure on industries; NRP only looks at particular goods. § ERPs have an impact on resource allocation: resources flow out of industries with low ERPs, and into industries with high ERPs. 13 -16

Export Taxes § An export tax is a tax a government places on its own exporters. § Are applied for several reasons • to raise government revenue. • to encourage domestic processing of raw materials. 13 -17

Export Subsidies § Governments can encourage exports by paying exporters a certain premium per unit exported. § Export subsidies work like export taxes in reverse. 13 -18

Non-Tariff Barriers § Trade gets restricted in ways not involving taxes: • import quotas, • “voluntary” export restraints (VERs), and • other provisions. 13 -19

Import Quotas § Many countries restrict the quantity of certain imports allowed entry in a given time period (usually a year). § Quotas affect the quantity directly and the price indirectly; tariffs do the opposite. § However, in most respects quotas and tariffs have the same effects. 13 -20

“Voluntary” Export Restraints § Importing countries “persuade” exporting countries to voluntarily limit their exports. • Example: 1. 68 million Japanese cars permitted annually beginning in 1981. § There is an implied threat of tariffs or quotas if exporting country doesn’t comply. § VERs exist for political reasons, not economically valid ones. 13 -21

Government Procurement Provisions § Some countries require their government to purchase from domestic suppliers unless the imported version is substantially cheaper. § Example: “Buy American” Act requires many U. S. government purchases to be from domestic firms unless domestic bid is more than 6% higher. 13 -22

Domestic Content Provisions § Some countries require that a certain percentage of the value of a good sold domestically must consist of domestic components or labor. § Example: NAFTA members do not allow duty-free access to goods unless at least 62. 5% of the goods’ value originates in NAFTA countries. 13 -23

European Border Taxes § European (and some other) countries have value added taxes that increase the prices of domestically produced goods. § To compensate, European countries impose tariffs on imported products. 13 -24

Other Non-Tariff Barriers § § § Administrative classification Restrictions on trade in services Trade-related investment measures Exchange rate controls Quality provisions Packaging and labeling requirements 13 -25