•Partial equilibrium analysis of tariffs in a single

industry: supply, demand, and trade

The Measuring the Amount of Protection

•Costs and benefits of tariffs
Instruments of •Export subsidies
•Import quotas
Trade Policy •Voluntary export restraints
•Local content requirements

Specific Tariff: Fixed fee per unit (e.g., $3/barrel of oil

Types of Tariffs
Ad Valorem Tariff: % of value (e.g., 25% on trucks)

1. Partial equilibrium Supply, Demand, and Without Trade: Home price > Foreign price
Trade in a Single
analysis of tariffs in With Trade: Goods flow Foreign → Home until price equalizes
Industry

a single industry
A tariff acts like a transportation cost, creating a price gap
Local content requirement provides neither where the Home price rises, the Foreign price falls, and goods
government revenue (as a tariff would) nor are only shipped if the difference covers the tariff.
quota rents.

Effects of Tariffs
The decisions of producers and consumers change, reducing the
quantity of imports and exports
7. Local content
A regulation that requires a specified fraction of
a final good to be produced domestically. requirements
a country imposes a tariff

Export credit subsidies

Other Trade Policies 2. Measuring the Amount
The effective rate of protection
of Protection measures how much protection a tariff provides
Government
procurement MINDMAP
CHAPTER 9 represents the change in value that firms in an
industry add to the production process when trade
Bureaucratic policy changes
regulations

often differ from tariff rates because tariffs affect

sectors other than the protected sector

Works like an import quota, except that the quota

is imposed by the exporting country rather than the Consumer surplus = Max. price willing to pay -
importing country.
6.Voluntary Export Actual price paid

Restraint 5. Import Quota: 3.Costs & Benefits of Tariffs

Producer surplus = Actual price received - Min.
These restraints are usually requested by the
a restriction on the quantity price willing to sell

importing country. of a good that may be

imported, usually enforced Surplus
Consumer surplus
by issuing licenses or quota
rights.
The profits or rents from this policy are earned by Price Producer surplus

foreign governments or foreign producers.

Consumer surplus (consumers worse off)

Effects Price Producer surplus (producers better off)

Quota rent - the extra profit that Tariff rate quotas - a hybrid of a quota and a
producers make when supply is tariff where a lower tariff is applied to Government gains tariffs revenue
artificially limited by an import imports within the quota than to those over Tariffs
quota the quota

4. Export Subsidy Welfare Impact Change in welfare = e - (b+d)

b & d - efficiency loss
e - TOT gain

Negative Effects
Trade retaliation hurt exporters

Hard to remove

Encourage wasteful
practices

Winners and Losers

of the Trump Trade Some tariffs were targeted at specific countries (mostly China but also the European Union later on)
A tariff raises the price of a War and covered many different goods.
good in the importing country

Tariffs do not provide a terms-of-trade benefit because foreign exporters do not lower their prices to
absorb the tax.

An ad valorem subsidy is a payment as a

Specific subsidy : a payment per unit proportion of the value exported.
exported.
America’s trading partners responded with equally high tariffs, notably China and its steel
and aluminum exporters..

An export subsidy raises the price in the exporting country,

decreasing its consumer surplus (consumers worse off) and
increasing its producer surplus (producers better off).
Tariffs for The Long
Haul
Tariffs can force manufacturers to find ways around them.