International Economics: Session 9: Trade Intervention Mechanism

International Economics
Session 9: Trade Intervention Mechanism
Faculty: Prof. Sunitha Raju
Session Date: 02.06.19

MBA(IB)
EPGDIB 2018-21
(2013-15)
What is Trade Intervention

1. Borders measures that restrict trade

 Tariffs
 Non-tariff barriers
2. An integral part of a country’s Trade Policy

MBA(IB)
EPGDIB 2018-21
(2013-15)
Why Trade Intervention

1. Infant industry argument
2. International pricing system is mostly on

the basis of imperfect competition.
3. Gains from trade are not equally distributed

between industries
redistribution for welfare
4. Other reasons:
 To remedy trade distortion
 Source of revenue
MBA(IB)
EPGDIB 2018-21
(2013-15)
Tariffs
1. Definition
 Tariff is a tax imposed on exports and
imports of goods
2. Forms of Tariff
 Ad Valorem
 Specific
 Compound
MBA(IB)
EPGDIB 2018-21
(2013-15)
Tariff for All Products in 2016

(in %)
Simple Non-Ad valorem Duties Duties> 15% (MFN
Average Applied)
Ad valorem
Country MFN Applied Share of HS 6 digit sub-headings in percent
USA 3.5 8.7 2.8
Australia 2.5 0.2 0.1
EU 5.2 4.6 4.4
Brazil 13.5 0 36
Argentina 13.7 0 36.1
China 9.9 0.5 14.6
Japan 4 3.7 3.6
India 13.4 5.2 17.1
Mexico 7 0.7 15.4
Vietnam 9.6 0 24.8
Thailand 11 9 24.5
Source: World Tariff Profile, WTO, 2017
MBA(IB)
EPGDIB 2018-21
(2013-15)
Tariff for Agricultural Products in
2016 (in %)
Simple Average Non-Ad valorem Duties> 15% (MFN)
Duties
Country MFN Applied Share of HS 6 digit subheadings in percent
USA 5.2 41.5 5.8
Australia 1.2 0.9 0.3
EU 11.1 32.1 22.7
Brazil 10 0 14.2
Argentina 10.3 0 15.3
China 15.5 0.3 34.9
Japan 13.1 11.6 20.5
India 32.7 0.3 81.5
Mexico 14.6 4.7 40.8
Vietnam 16.3 0 41.5
Thailand 31 23.7 70

MBA(IB)
EPGDIB 2018-21
(2013-15)
Measures of Tariff Levels

1. Unweighted Average of Tariff Rates

 feasible when countries import equal
amount of different goods
2. Weighted Average
 tariff rate weighted by the share of imports
3. Traded vs. Non-traded Goods

 Prohibitive Tariff
MBA(IB)
EPGDIB 2018-21
(2013-15)
(Ad valorem)
1. Unweighted Average
 Goods imported : X and Y
 Tariff rates : 25% and 50%
 Average = (0.25 + 0.50)/2 = 0.375
or 37.5%
2. Weighted Average
 Goods imported : X and Y
 Tariff rates : 25% and 50%
 Quantity imported = $80 and $20
Weighted Average= (80) x 0.25 + (20) x 0.50
100 100
= 0.30 or 30
 Quantity imported = $50 and $50
Weighted Average= (50) x 0.25 + (50) x 0.50
100 100
= 0.375 or 37.5%
Contd…
MBA(IB)
EPGDIB 2018-21
(2013-15)
(Ad valorem)
3. Prohibitive Tariff
 Tariff that is high enough to completely restrict
imports
 Suppose a tariff on good Y is increased from 50% to
100%
 Imports have fallen to zero
 The average tariff (weighted) = 25%
With an increase in tariff, the average tariff of a
country decreases
MBA(IB)
EPGDIB 2018-21
(2013-15)
Applied Tariff Levels in Countries
Ad valorem
All Products Agricultural Products Non-Agricultural Products
Country Simple Weighted Simple Weighted Simple Weighted

Average average Average average Average average
(2016) (2015) (2016) (2015) (2016) (2015)
USA 3.5 2.4 5.2 3.8 3.2 2.3
Australia 2.5 4 1.2 2.4 2.7 4.1
EU 5.2 3 11.1 7.8 4.2 2.6
Brazil 13.5 10.4 10 12.3 14.1 10.3
Argentina 13.7 12.8 10.3 12.9 14.3 12.8
China 9.9 4.4 15.5 9.7 9 4
Japan 4. 2.1 13.1 11.1 2.5 1.2
India 13.4 7.6 32.7 38 10.2 5.6
Mexico 7 4.5 14.6 20.1 5.7 3.5
Vietnam 9.8 6.8 17.0 8.8 8.7 6.6
Thailand 11 6.8 31 36.3 7.7 5

MBA(IB)
EPGDIB 2018-21
(2013-15)
Understanding the Effects of

Tariff
1. Small Country
 Share in world exports/ world imports small
 Mainly a price taker
2. Large Country
 Share in world exports/world imports high
 Can exert monopoly power
MBA(IB)
EPGDIB 2018-21
(2013-15)
How does a Small Country’s Tariff
Affect Welfare?
P
D S
B C F
P1 PD
A J K H
P0 Pint
G
Q0s Q1s Q1D Q0D Q

 Loss in consumer surplus = ABFH
 Gain in producer surplus = ABCJ
 Gain in govt. revenue = KCFG
 Efficiency loss: JCK & GFH
MBA(IB)
EPGDIB 2018-21
(2013-15)
Welfare Effects of Import Tariff:
Large Country (1)
Py Sd
E
Sd+w+t
Sd+w
t
1 I H
PY
0
j m n r
P C
Y F s
P2
Y
Dd
G
0 Y1 Y3 Y2 Y0 Y
MBA(IB)
EPGDIB 2018-21
(2013-15)
Market Effects of Tariff: Large
Country
1. Domestic price rises

2. Domestic consumption changes affects foreign
suppliers (tariff burden shared between
consumers and foreign suppliers)
3. Terms of trade of exporting countries
deteriorate
4. Domestic producers gain
5. Government earn revenue
MBA(IB)
EPGDIB 2018-21
(2013-15)
Welfare Effects of Import Tariff:
Large Country (2)
If Then:
m + r = s No net effect on domestic welfare
Negative net effect on world welfare
m + r < s Positive net effect on domestic
welfare Negative net effect on world
welfare
m + r > s Negative net effect on domestic
welfare
MBA(IB)
EPGDIB 2018-21
(2013-15)
Optimal Tariffs and Threat of
Retaliation
1. Optimal tariff maximises the welfare of a

country
2. Tariffs lower welfare by
 reducing quantity imported (volume-of-trade
effect)
 reducing the export prices of foreign producers
(terms of trade effect)
 For a large country improvement of terms of
trade leads to deterioration of terms of trade
for trading partner
 Beggar they neighbour policies (leads to retaliation)
MBA(IB)
EPGDIB 2018-21
(2013-15)
Average MFN Applied Duties in
2016 : Product-wise
(Ad valorem in %)
Country Dairy Fruit Coffee Cereals and Oilseeds Sugar Beverage Cotton
Product Veg - Tea preparations Fats and and and
Plants oils confec. tobacco
USA 16.6 4.7 3.3 3.1 7.2 16.4 19.1 4.6
Australia 3.1 1.4 1 1.1 1.5 1.8 3.5 0
EU 35.4 10.5 6.1 12.8 5.6 23.6 19.6 0
Brazil 18.3 9.8 13.3 10.7 7.6 16.5 17.2 6.4
Argentina 18.3 10 14.3 10.9 8.5 17.6 17.8 6.4
China 12.3 14.8 14.9 23 10.9 28.7 23.5 18
Japan 65.7 9.4 14.3 32.3 5.9 20.6 14.6 0
India 33.5 29.4 56.3 31.1 35.1 35.9 68.6 6
Mexico 21.6 15.8 20.8 9.5 8.7 31 25.7 0
Vietnam 12.8 24.4 29.8 21.6 8.6 15.8 50 6
Thailand 38.1 40.3 45.3 23.8 32.8 42.6 44.7 0

MBA(IB)
EPGDIB 2018-21
(2013-15)
Maximum MFN Applied Duties in
2016 : Product-wise
(Ad valorem in %)
Country Dairy Fruit Coffee - Cereals and Oilseeds Sugar Beverage Cotton
Product Veg Tea preparations Fats and and and
Plants oils confec. tobacco
USA 63 132 48 38 164 64 350 16
Australia 19 5 5 5 5 5 5 0
EU 96 157 23 63 170 127 152 0
Brazil 28 35 20 20 12 20 20 8
Argentina 28 35 35 31 35 20 35 8
China 20 30 32 65 30 50 65 40
Japan 558 277 133 613 380 50 38 0
India 60 100 100 150 100 60 150 30
Mexico 50 100 50 45 45 100 67 0
Vietnam 20 40 40 40 35 40 135 10
Thailand 216 337 90 73 146 94 128 0

MBA(IB)
EPGDIB 2018-21
(2013-15)
Measuring Tariff Protection

i) Nominal Tariff (Ad Valorem)

– does not reflect the true protection accorded to
producers
ii) Effective Tariff
– depends on the stage of production process the tariff
is applied
tariffs on intermediates vs finished goods
– Tariff escalation or cascading tariffs
iii) Effective Rate of Protection (ERP)
MBA(IB)
EPGDIB 2018-21
(2013-15)
Effective Rate of Protection (ERP):
Examples
Assume
 C.I.F. import price of leather wallet in Belgium =
1,000 Belgian Francs
 Cost of leather (input) = 500 Belgian Francs
 Domestic value addition = 500 Belgian Francs

Share of Domestic value addition in product price = 0.5
or 50%
MBA(IB)
EPGDIB 2018-21
(2013-15)
Case 1 (40% tariff on wallet & 20% tariff on leather)

 Domestic price of imported wallet = 1400 Francs
 Domestic price of leather = 600 Francs
 Domestic value addition (under protection)

= 1,400 – 600 = 800 Francs
 Domestic value addition (under free trade) = 500
 Effective protection = 800 – 500 = 300
or 300/500 = 60%
with a nominal tariff of 40%, the effective protection is 60%
MBA(IB)
EPGDIB 2018-21
(2013-15)
Case 2 (30% tariff on wallet & 40% tariff on leather)
 Domestic price of imported wallet = 1300 Francs

 Domestic price of leather = 700 Francs
= 1,300 – 700 = 600 Francs
 Effective protection = 600 – 500 = 100
or 100/500 = 20%
When the tariff on inputs exceeds the final product, the
effective protection is less than the nominal tariff
MBA(IB)
EPGDIB 2018-21
(2013-15)
Case 3 (share of domestic value addition decreases

to 20% or 0.2)
 40% tariff on wallets & 20% tariff on leather will lead
to an effective protection of 120%

= 1400 – 960 = 440
 Domestic value addition (free trade) = 200
when inputs are imported at zero or low tariffs for final
processing, moderate tariffs on final products translates into
high effective protection.
MBA(IB)
EPGDIB 2018-21
(2013-15)
Measures of Effective Protection

t  ai t i
g
1  ai
g = rate of effective protection to producers of the final commodity

t = nominal tariff rate on consumers of the final commodity
ai = ratio of the cost of the imported input to the price of the final
commodity in the absence of tariffs.
ti = nominal tariff rate on the imported input
MBA(IB)
EPGDIB 2018-21
(2013-15)
Effective Rates of Protection or “Cost Penalties”
Facing Exports in Four Selected Countries
(percentage change in value added as a result of tariffs)
Brazil China India Mallawi

1986 1997 1986 1997 1986 1997 1986 1997
Agriculture -43 -5 -28 -15 -14 -5 -9 -7
Agricultural -83 -28 -72 -54 -64 -39 -20 -16

processing
Resources -45 -6 -14 -7 -9 -3 -6 -5
Labor-intensive -72 -17 -54 -35 -45 -23 -18 -15
manufacturing
Capital-intensive -79 -22 -46 -28 -60 -35 -11 -9
manufacturing
Services -31 -3 -26 -14 -16 -6 -5 -4
Source: World Bank, Global Economic Prospects, 2004

MBA(IB)
EPGDIB 2018-21
(2013-15)
Conclusion: Implications of Trade
Restriction
 Reduction in exports of tariff-imposing country

(resources shift from export to import
substituting industries)
 Tariff leads to redistribution of income among

the factor inputs
(scarce factor gain & abundant factor looses)
 Protection on end products can lead to increased

imports of intermediate inputs
 Protection impairs cost reducing innovation in

the domestic country
MBA(IB)
EPGDIB 2018-21
(2013-15)
Export Taxes
Why Export taxes

 To keep the domestic price of the good low
 To raise the prices in the foreign market (large

country)
MBA(IB)
EPGDIB 2018-21
(2013-15)
Effects of Export Tax : Small
Country
PX
Sd
1 E Dw
PX j
f g h t
P1X - t Dw - t
PO
X
Dd
0 X2 X4 X3 X1 X
MBA(IB)
EPGDIB 2018-21
(2013-15)
Net Welfare Effects of Export Tax by
Large Country
Px
Sd
P2x
kf
P0 x j f h
g
P1x
Dd+w
t
Dd+w - t
Dd
0 X1 X3 X2 X0 X
MBA(IB)
EPGDIB 2018-21
(2013-15)
Net Welfare Effects of Export Tax
by Large Country
If Then:
h+j=k No net effect on domestic welfare
Negative net effect on world welfare
h+j<k Positive net effect on domestic

welfare
h +j > k Negative net effect on domestic
welfare

International Economics: Session 9: Trade Intervention Mechanism

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International Economics: Session 9: Trade Intervention Mechanism

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Formate disponibile

International Economics

Session 9: Trade Intervention Mechanism

Faculty: Prof. Sunitha Raju

Session Date: 02.06.19

What is Trade Intervention

1. Borders measures that restrict trade

2. An integral part of a country’s Trade Policy

Why Trade Intervention

2. International pricing system is mostly on

3. Gains from trade are not equally distributed

redistribution for welfare

Tariff for All Products in 2016

Source: World Tariff Profile, WTO, 2017

Measures of Tariff Levels

1. Unweighted Average of Tariff Rates

3. Traded vs. Non-traded Goods

Country Simple Weighted Simple Weighted Simple Weighted

Source: World Tariff Profile, WTO, 2017

Understanding the Effects of

Q0s Q1s Q1D Q0D Q

1. Domestic price rises

1. Optimal tariff maximises the welfare of a

Source: World Tariff Profile, WTO, 2017

Source: World Tariff Profile, WTO, 2017

Measuring Tariff Protection

i) Nominal Tariff (Ad Valorem)

 Cost of leather (input) = 500 Belgian Francs

 Domestic value addition = 500 Belgian Francs

Case 1 (40% tariff on wallet & 20% tariff on leather)

 Domestic price of leather = 600 Francs

 Domestic value addition (under protection)

 Effective protection = 800 – 500 = 300

Case 2 (30% tariff on wallet & 40% tariff on leather)

 Domestic price of imported wallet = 1300 Francs

Case 3 (share of domestic value addition decreases

 Domestic value addition (under protection)

Measures of Effective Protection

g = rate of effective protection to producers of the final commodity

Brazil China India Mallawi

Agricultural -83 -28 -72 -54 -64 -39 -20 -16

Source: World Bank, Global Economic Prospects, 2004

 Reduction in exports of tariff-imposing country

 Tariff leads to redistribution of income among

 Protection on end products can lead to increased

 Protection impairs cost reducing innovation in

Why Export taxes

 To raise the prices in the foreign market (large

h+j<k Positive net effect on domestic

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