International Economy

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CHAPTER 4: TARRIFS

CHAPTER OVERVIEW

This chapter discusses the operation and effects of tariffs. The chapter first defines import tariff, export tariff, specific tariff, ad valorem tariff, and compound tariff. Next discussed is the effective rate of tariff protection and the process of tariff escalation. Attention then turns to postponing import duties via bonded warehouses and foreign trade zones.

The chapter examines the welfare effects of an import tariff for a small importing country and a large importing county. It is noted that if a nation is small compared to the world its overall welfare necessarily falls if it levies a tariff on imports. If the importing nation is large relative to the world, the imposition of an import tariff may improve its welfare.

The chapter then examines the merits of trade restrictions. Among the arguments for trade barriers are 1. Job creation, 2. Protection against cheap foreign labor, 3. Fairness in trade, 4. Maintenance of the domestic standard of living, 5. Equalization of production costs, 6. Infant-industry argument.

Types of Tariffs
Tariffs can be specific, ad valorem, or compound. 1.A specific tariff is expressed in terms of a fixed amount of money per physical unit of the imported product. For example, a U. S. importer of a German computer may be required to pay a duty to the U. S. government of $ 100 per computer, regardless of the computer’s price. Therefore, if 100 computers are imported, the tariff revenue of the government equals $ 10,000 (100 x100 =10,000).

2.An ad valorem (of value) tariff, much like a sales tax, is expressed as a fixed percentage of the value of the imported product. Suppose that an ad valorem duty of 2.5 percent is levied on imported automobiles. Therefore, if $ 100,000 worth of autos are imported, the government collects $ 2,500 in tariff…...

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