Trade Restrictions

Tariffs

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 In no period in history has trade been

completely free. There have always been barriers to trade. We will explore a number of trade barriers and their effects In this report, we will concentrate on tariffs.

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 Tariffs

- as termed in international trade, are simply taxes levied on goods as they cross international borders

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Types of Tariff
ad valorem tariff is expressed as a

fixed percentage of the value of the traded commodity

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Types of Tariff
Ad valorem tariff specific tariff is expressed as a fixed

sum per physical unit of the traded commodity

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Types of Tariff
Ad valorem tariff specific tariff

compound is the combination of the ad

valorem and specific tariff.

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Examples
A 10% ad valorem tariff on imported

bicycle
A $10 specific tariff on imported bicycles

5% ad valorem and $10 specific tariff

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Partial Equilibrium Analysis of a Tariff

Effects

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 Partial equilibrium analysis of a tariff is the most appropriate when a small nation imposes a tariff on imports competing with the output of a small domestic industry. We uses a partial equilibrium model, thus focusing only on the market for a single good and ignoring any interactions with other markets.
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Effects of a tariff: small country

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Our equilibrium occurs at price $3 and quantity 30X. In this market, if the international price is Px=$1, the country will be an importer of the item. Domestic production will fall from 30X to 10X. Domestic consumption will rise from 30X to 70X. These changes generate imports of 60 units.

If this nation imposes a 100% ad valorem tariff on the imports of commodity X, Px in this nation will rise to $2 For the same $1 increase in Px of this nation as a result of the tariff, the more elastic and flatter Dx is, the greater the consumption effect. Similarly, the more elastic Sx is, the greater the production effect. Thus, the more elastic Dx and Sx are, the greater the trade effect of the tariff and the smaller the revenue effect of the tariff.

Effects of tariff
Consumer and Producer Surplus

To show the welfare changes from the tariff the concepts of consumer and producer surplus must be considered.
Consumer surplus is the difference between what consumers are willing to pay for a specific amount of a commodity and what they actually pay for it.
Graphically, consumer surplus is the area under the demand curve and above the price paid on every unit purchased

To show the welfare changes from the tariff the concepts of consumer and producer surplus must be considered.
Consumer surplus is the difference between what consumers are willing to pay for a specific amount of a commodity and what they actually pay for it.

Producer surplus is the extra payment received by producers above what needed to have been paid to cause them to produce the commodity.
Graphically, producer surplus is the area below the price received and above the supply curve on every unit sold.

Consumer Surplus
When the nation moves to free trade this surplus increases. ARB($3.5x70X)1/2= $122.5 The imposition of a tariff reduces this surplus by the difference between the international and the tariff price. From ARB($3.5x70X)1/2= $122.5 to GRH($2.5x70X)1/2=$62.5 Or by the shaded area AGHB=$60

Producer Surplus
Opening the economy to free trade reduces the surplus. Imposing a tariff increases the producer surplus. Producers surplus that results from a tariff is given by the shaded area AGJC=$15. Reasons: At free trade Px=$1, domestic producers produce 10X and receive 0ACV=$10 in revenues. With the tariff and Px=$2, they produce 20x and receive 0GJU=$40. Of the $30 increase in the revenue of producers, VCJU=$15 represents the increase in cost of production, the remainder AGJC=$15 represents the increase in producers surplus.

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