Chapter 5 Import Protection Policy: Import Tariffs
I. Chapter Overview
1. Types of import tariffs
in terms of the means of collection
in terms of the different tariff rates applied
in terms of special purposes for collection
2. The effects of import tariffs
concepts of consumers surplus and producers surplus
the welfare effects of import tariffs
3. Measurement of import tariffs
the "height" of import tariffs
nominal versus effective tariff rates
II. Chapter Summary
1. The means of collecting import duties are specific duty, ad
valorem duty, mixed or compound duty and alternative duty.
2. Preferential duty, generalized preferential duty, MFN duty
and general duty are different tariff rates.
3. A countervailing duty (CVD) is a tariff designed to
"counter" the effects of the foreign export subsidy. An
anti-dumping duty is a duty to imports to offset the effects of
dumping.
4. The Agreement on Implementation of Article VI of GATT 1994
(the Anti-Dumping Agreement) defines the determination of normal
value.
5. In recent one or two decades, the People's Republic of
China has been the number one target of anti-dumping actions filed
by WTO members. There are two main reasons: One is because the PRC
is one of the world's lowest cost producers. The other is it is
classified as a nonmarket economy, and special rules must be used
to determine the cost of production.
6. The welfare effect of a tariff imposed by a "small"
importing country is a deadweight loss. For a "large" country that
can affect foreign (world) prices, the welfare effect of a tariff
is ambiguous.
7. There are two measures of a country's average tariff rate:
unweighted average tariff rate and weighted average tariff rate.
The difference between the two is that the unweighted average
tariff rate does not take into account the relative importance of
the imports while the weighted average tariff rate does.
8. The nominal tariff rate is the tariff rate in the tariff
schedule and is the simplest way to estimate the nominal rate of
protection of an industry. The effective rate of protection (ERP)
is the rate by which the value added increase after the imposition
of tariffs. The nominal tariff rate is useful for assessing the
price impact of tariffs on consumers. For producers, however, the
effective rate is more useful.
III. Review Questions
A. Briefly define the concepts
tariff
specific duty
ad valorem duty
mixed or compound duty
preferential duty
generalized preferential duty
GSP
MFN duty
general duty
countervailing duty (CVDs)
dumping
anti-dumping duty
consumer surplus
producer surplus
nominal tariff rate
effective tariff rate
B. Question and Problems
1. Explain why a country's use of preferential duties is
inconsistent with MFN treatment of trading partners by that
country.
2. What are the prerequisites for WTO members to impose
anti-dumping measures according to Article VI of GATT 1994 and the
Anti-Dumping (ADP) Agreement?
3. Explain why in recent one or two decades, China has been
the number one target of anti dumping actions filed by WTO
members.
4. Suppose that the free trade price of a good is US$10 and a
10 percent ad valorem tariff is put in place. As a result, domestic
production in a small country rises from 100 units to 110 units and
imports fall from 60 units to 30 units. Who are the winners and
losers? What is the size of their gains and losses? What is the net
effect on society?
5. Suppose that under free trade a final commodity F has a
price of US$20 and the price of the only input A to commodity Fis
US$15. Now consider the following three situations where protective
tariffs exist.
(a) Suppose that the tariff rate on the final good is 10%, and
no tariff rate on input A.
(b) Suppose that the tariff rates on both the final good and
the input A are 10%.
(c) Suppose that the tariff rate on the final good and the
input A is 10% and 20% respectively.
Calculate the ERP for the domestic industry producing good F
and interpret the meaning of this calculated ERP.
6. Suppose that a country announces that it is moving toward
free trade by reducing its tariffs on intermediate inputs while
maintaining its tariffs on final goods. What is your evaluation of
the announced "free-trade" direction of the country's policy?
C. Multiple-choice questions
1. Which of the following is NOT an example of a nontariff
barrier to the free flow of goods?
a. Import quotas. ( )
b. Voluntary export quotas (VERs).
c. Restrictive official foreign exchange allocation.
d. Specific duty ofUS$20.00 per metric ton on each imported
item.
2. The tariff on sugar by Country A was US$0.2 per kilogram
plus 5.5 percent of the value of sugar. This is an example of (
).
a. a specific tariff.
b. a nontariff barrier.
c. an ad valorem tariff.
d. a combination of a specific tariff and an ad Valorem
tariff.
3. The situation in the developed countries whereby an import
good faces a lower tariff if the good comes from a developing
country than if the good comes from a developed country is known as
( ).
a. GSP treatmentb. MFN treatment
c. OAP treatmentd. ERP treatment
4. If Country A gives most-favored-nation (MFN) treatment to
Country B. This means that the tariff schedules applicable to
Country A's imports from Country B ( )
a. have lower tariff rates than the rates applicable to other
countries to which Country A grants MFN treatment.
b. have the same tariff rates as the rates applicable to other
countries to which Country A grants MFN treatment.
c. have lower tariff rates than the rates applicable to any
other country sending goods to Country A.
d. have tariff rates of zero percent.
5. The use of the most-favored-nation (MFN) principle is an
attempt to attain ( ) toward competing suppliers of imports to a
country. Hence, the arrangement whereby developed countries permit
duty-free entry on some goods coming from developing countries but
levy tariffs on the same goods if coming from other developed
countries is ( ) the MFN principle.
a. discrimination; a departure from b. discrimination; an
example of
c. nondiscrimination; a departure fromd. nondiscrimination;
an example of
6. In the following graph for a small country showing the
situation under free-trade in a product (at a price of US$10) and
the situation with a tariff (at a price ofUS$11), the net welfare
loss (or total deadweight loss) to the country from the imposition
of the tariff is ( ).
a. 2. b. 5. c. 6. d. 10.
7. In the graph in Question 6, after the imposition of the
tariff, what is the amount of tariff revenue collected by the
government? ( ).
a. US$2.b. US$6.c. US$8. d. US$10.
8. An import tariff imposed by a small country will ( ).
a. increase the domestic price of the good by an amount equal
to the tariff.
b. decrease the domestic price of the good by an amount equal
to the tariff.
c. increase the domestic price of the good by an amount less
than the tariff.
d. lead to an increase in domestic consumption of the
good.
9. Other things equal, which one of the following will cause
an increase in the effective rate of protection (ERP) in the
automobile industry?
a. A decrease in the nominal tariff rate on automobiles.
b. An increase in the nominal tariff rates on imported inputs
used in making automobiles.
c. An increase in the world price of imported inputs used in
making automobiles.
d. A decrease in the nominal tariff rates on imported inputs
used in making automobiles.
10. Given the following information for industry X in country
A, and assuming that at least some of input Y is imported, that one
unit of Y is required for each unit of X, and that country A is a
"small" country:
Free trade price Nominal tariff rate
Final product X US$100 10%
Input Y (onlv input to X) US$80 5%
the effective rate of protection (ERP) for industry X
ispercent.
a. 5b. 10c. 30d. 40