Foreign Trade Dersi 5. Ünite Özet

Overview of Tariffs

When a country is involved in trade, the government of that country establishes various barriers or constraints to restrict trade, often taxes. These taxes are called tariffs.

Tariffs can be imposed for protection or revenue functions. A protective tariff refers to decreasing the number of imported products and components entering a country and they protect import-competing manufacturers from overseas competition. A revenue tariff is imposed for the motive of generating tax revenues and may be placed on either exports or imports

Types of Tariffs

Specific tariff: A specific tariff is a tariff rate charged as a fixed amount per quantity. In other words, it is comparatively easy to apply and administer (as a fixed monetary duty per unit of the imported product), specifically for standardized commodities and staple goods where the value of the dutiable products cannot be easily found.

Ad-valorem tariff: Ad-valorem tariff is a tariff rate charged as a percentage of the price. Under a system of ad-valorem tariffs, for example, an individual importing a $20,000 Volkswagen would have to pay a higher duty than a person importing a $19,900 Opel. Ad-valorem tariff has a tendency to keep a consistent degree of protection for home manufacturers during periods of changing prices.

Compound tariff: The combination of both specific and ad-valorem tariff is called Compound tariff. It is frequently applied to manufactured goods embodying raw materials which are subject to tariffs. In this type, the specific part of the tariff neutralizes the cost drawback of home producers, which results from tariff protection granted to home suppliers of raw materials, and the advalorem part of the duty offers protection to the finishedproducts industry.

There are three basic functions of tariffs:

1. serving as a source of revenue,
2. shielding domestic industries,
3. remediation of trade distortions (as a sanction).

The advantages of using tariffs:

• It provides revenue to government based on imported products.
• A tariff can be levied to shield domestic companies.
• A tariff surges the price of the imported products, sometimes uplifting its status to that of a luxury product.
• A tariff may be used to raise the price of an exported product.
• Export tariffs can also be used to regulate the advancement of rival industries in different countries.
• Export tariffs may also be used to discourage the export of products which are deemed as critical assets.
• Another benefit oftariff isthat a government can also impose an export tariff to lessen the consumption of an extraordinary resource or good.

The disadvantages of using tariffs:

• Tariffs impede with the concept of ‘free trade’ because it mainly focuses on the protection local industries.
• Defensive tariffs may prevent innovation and cripple manufacturing.
• Import tariffs hurt consumers who would like to buy products made in abroad.
• In order to take diplomatic measurements, tariffs have been used as a tool to hurt countries.

Economic Effects of Tariffs

Tariffs have a number of economic effects examined through different analyses.

The Effect of a Tariff on Producers and Consumers

Generally, domestic manufacturers competing in opposition to imports will get advantage from a tariff. If a government places a tax on imports of a product, the domestic price of the imported product will increase. Domestic manufacturers can then widen their own production and sales, or increase the price they charge, or both. The tariff, by way of taxing imports to make imports less competitive within the domestic marketplace, should make domestic manufacturers better of.

Tariff as a Government Revenue Instrument

One of the important benefits of tariffs is that they act as the revenue of government. The effects of a tariff on the well-being of consumers and producers do not exhaust its effects on the importing country. Imposing a tariff with an optimal basis on exporting countries brings revenue to the country’s government. In order to receive this revenue from tariff, the government could follow various ways. This revenue can be utilized in different projects of a country.

The Net National Loss from a Tariff

Despite significant benefits of tariff, a nation can experience losses from it. The net effect of the tariff on the importing nation as a whole can be determined by combining the effects of the tariff on consumers, producers, and the government. The first key step is to impose a social value judgement. How much do we really care about each group’s gain or losses? If one group gains and another loses, how big must the gain be to outweigh the other group’s loss? To make any overall judgement, one must first decide how to weigh each dollar of effect on each group. Every dollar of gain or loss is just as mportant as every other dollar of gain or loss, regardless of who the gainers or losers are.

Tariff Effect on a Small Country

The global market is not affected when a small country imposes tariffs. However, the domestic price of the importable commodity rises, and that affects domestic customers in the small nation. Although the price of an importable commodity rises by the full amount of the tariff for individual producers and consumers in the small country, its price remains constant for the small nation as a whole since the nation itself collects the tariff.

Tariff Effect on Large Country

In order to evaluate the general equilibrium effects of a tariff in a large country, using offer curves is more suitable. Once a country imposes a tariff, its offer curve shifts or rotates toward the axis measuring its importable goods by the amount of the import tariff. The explanation is that for any amount of the export goods, importers wish sufficiently more of the import goods to additionally cover (i.e., pay for) the tariff. The very fact that the nation is big is mirrored within the trade partner’s (or rest of the world’s) offer curve having some curvature instead of being a straight line.

The Optimal Tariff

When a country can gain by imposing a tariff, we might ask what the best possible tariff level is. This is known as the optimal tariff issue. Conventionally, the term “optimal tariff” refers to the tariff justified by the terms of trade argument. The terms of trade argument for tariffs is based on the assumption that countries are large enough to influence the world relative prices of their imports and exports.

Non-Tariff Restrictions

Due to the declination of the importance of tariff in the current world, non-tariff restrictions have surged substantially. Non-tariff restrictions refer to non-tariff barriers (NTBs). They have become a moot topic in trade activity over the past decade. They are a matter of concern because they’re not ancient strategies of discouraging imports through the application of duties. Instead, they work to slow the flow of products into a country by increasing the physical and administrative difficulties concerned in importation.

Types of Non-Tariff Restrictions

Non-tariff restrictions cover all sorts of applications other than tariffs. These consist of technical rules, different standards of products in keeping with nations, health, safety, and environmental regulations.

Non-tariff restrictions include quantity restrictions, foreign exchange restrictions and import prohibitions and embargoes.

These are summerized below.

Quantity Restrictions

Quantity restrictions are a more effective means of protection in international trade than other measures due to an absolute restriction on goods entering the country.

Import Quotas: The most broadly used technique to restrict quantity, volume, or value-based imports is the imposition of quotas on imports into a country. These quotas may be unilateral in accordance with commodity and stipulate that only a certain aggregate amount of the import from any source may enter a country.

Tariff Quotas: A tariff quota allows the import of a certain amount of a commodity duty-free or at a lower duty rate while amounts exceeding the quota are subject to a higher duty rate.

Foreign Exchange Restrictions

Multiple Exchange Rate System: Nations implement various exchange rates in the flow of goods and services in the multiple exchange rate system. Thus, if nations want to prevent the import of a product, they apply the multiexchange rate policy and achieve their objective with a high exchange rate.

Foreign Exchange Control: Another tool of foreign exchange restriction is foreign exchange control, which is used in quantity restrictions. It is intended to restrict foreign exchange transactions. Thus, the exchange can only be understood with the condition of being filled.

Import Prohibitions and Embargoes

One of the most advanced level import restriction is import prohibitions. In this case, the entry of a product into a country is entirely banned. Prohibition of import may also include non-economic objectives. On the other hand, embargoes are one of the strictest kinds of restriction among all non-tariff restrictions. In the embargo, trade is restricted in two ways: entry of products from a country and the sale of products to that country.

Other Non-Tariff Restrictions and New Protectionism

During the past twenty years, other non-tariff restrictions, or the new protectionism, have become more important than tariffs as obstructions to the flow of global trade. These represent a major threat to the world trading system. The following section summarizes these other non-tariff restrictions.

Voluntary Export Restraints (VERs) : Voluntary export restraint is a restriction set by a government on the volume of products that can be exported to other countries during a specified period of time.

Domestic Production Subsidies: A domestic production subsidy is a payment made by a government to a particular industry based on the output or production. The subsidy can be specified either as an ad-valorem subsidy or as a specific subsidy.

Export Subsidies: Export subsidies are also payments made by a government in order to inspire the export of specified goods. As with taxes, subsidies can also be imposed on the basis of specific or ad-valorem. Agricultural and dairy products are the most common product groups where export subsidies are implemented.

Dumping: Dumping is a sale of goods abroad at low a price, below their cost and price in the home market. According to World Trade Organization (WTO), “dumping is, in general, a condition of international price discrimination, where the price of a good, when sold in the importing country, is less than the price of that good in the market of the exporting country.

Anti-Dumping Duty: Anti-dumping duty is a tariff imposed on imports manufactured in overseas countries and priced below the fair market value of similar goods in the domestic market.

International Cartels: An international cartel is an arrangement to avoid some or all forms of competition, the parties to which are business enterprise domiciled under more than one government and trading across national frontiers. Such a cartel may include the major enterprises which operate in a given industrial field throughout the world.

Technical, Administrative, and Other Regulations: All administrative and technical regulations that directly affect the volume of imports are also known as invisible obstacles. These include safety regulations for automobile and electrical equipment, health regulations for the hygienic production and packaging of imported food products, and labelling requirements showing origin and contents.