Tariff and Non-Tariff Barriers

Nitya Nanda

The Energy & Resources Institute (TERI)

Fourth RIS-EXIM Bank Summer School on

International Trade Theory and Practice

Outline

Introduction/key terms/concepts

Partial Equilibrium Analysis of a Tariff

The Theory of Tariff Structure

General Equilibrium Analysis of a Tariff

The Optimum Tariff

Tariff structure and effective protection

Export subsidy

Import quota

Voluntary export restraints

Changing Tariff scenario and impacts

Measuring NTBs

Introduction

While it is generally accepted that free trade

maximizes world output and benefits all

nations.

Trade policies are advocated by special groups

that stand to benefit from trade restrictions

Most nations impose some restrictions on the

free flow of international trade

Trade Policy

Actions taken by government to influence the

country’s volume and composition of trade

Types of Commercial Policy

Tariff

Quota

Subsidy

Nontariff Barriers

Tariff, Quota and Subsidy

Tariff

A tax imposed by government on either imports or

exports

Quota

A government-imposed limit on the value or quantity of

an import or export good

Subsidy

A government payment to a domestic industry to

encourage exports or discourage imports

Nontariff Barriers

A wide range of government policies other than tariffs

designed to affect the volume or composition of a

country’s international trade

These NTBs include:

Health and safety standards (SPS/TBT)

Pre-shipment inspection

Government procurement policy

Price control

Anti-dumping (though it is in form of a duty)

Chanellization

An import tariff is a tax or duty levied on

imported commodities.

This is the most common form of tariff.

An export tariff is a tax on exported commodities.

Not imposed by many countries, but occasionally

practiced in some countries to generate government

revenue or discourage export of some commodities

Recently caused some controversy including dispute at

the WTO

Import vs. export tariffs

Ad valorem tariff

A fixed percentage on the value of the traded

commodity.

Specific tariff

A fixed sum per physical unit of a traded

commodity.

A compound tariff

A combination of an ad valorem and specific tariff.

Types of tariff

Resulting Effects of Tariff

Consumption effect

Reduction in domestic consumption (increase in domestic

consumption in case of export tariff)

Production effect

Expansion of domestic production (Decline in domestic production in

case of export tariff, but expansion of final good can happen if the

export tariff is on inputs)

Trade effect

Decline in imports (or exports in case of export tariff)

Revenue effect

Revenue collected by the government

Resulting Effects of Tariff (2)

Consumer surplus is the difference between what

consumers would be willing to pay and what they

actually pay.

Imposition of a tariff reduces consumer surplus.

Increase in producer surplus, or rent, is the payment

that need not be made in the long run to induce

domestic producers to supply additional goods with the

tariff.

Also called subsidy effect of tariff.

Resulting Effects of Tariff (3)

Tariff redistributes income -

From domestic consumers (who pay higher price for the

commodity) to domestic producers (who receive the higher

price)

From nation’s abundant factor (producing exports) to the

scarce factor (producing imports).

But the effect of tariff in a small nation is totally

different from the effect of a tariff in a large nation

Tariffs and partial equilibrium (small country)

quantity

demand

supply

price

q0 q1 q4q3q2

p0

p0(1+t)

p2

imports without tariff

imports with tariff

tariff

increase producer surplus

net loss; Harberger triangles

decrease consumer surplus

government revenue

Two Deadweight Costs of the Tariff

Production deadweight cost—refers to the protective effect

of the tariff which allows domestic firms to increase

production above free trade levels (left triangle).

Consumer deadweight cost—the value of lost consumer

satisfaction due to a shift in consumption

to less-desired substitutes brought on by the higher price

(right triangle).

Total deadweight cost = ½ x tariff x reduction

in imports

Tariffs and partial equilibrium (large country)

quantity

demand

supply

price

q0 q1 q4q3q2

p0

p1(1+t)

p2

imports without tariff

imports with tariff

tariff

p1

increase producer surplus

= net loss; possible gain

decrease consumer surplus

government revenue

-/-

General Equilibrium Analysis of a Tariff in a Small Country

A small nation will not affect prices on the world market

when imposing a tariff.

Domestic price of importable commodity will rise by the full

amount of the tariff for individual producers and consumers

in the small nation.

Price remains constant for nation as a whole because the

nation collects the tariff.

Volume of trade for small nation declines, but terms of trade

do not change, so welfare always falls.

The Stolper-Samuelson Theorem

It postulates that an increase in the relative price of a commodity raises the return or earnings of the factor used intensively in the production of the commodity.

For example, when a nation imposes an import tariff on X, Px/Py rises for domestic producers and consumers and it will raise the real wage of labor if X is labor intensive.

The Stolper-Samuelson theorem is always true for small nations and is usually true for large nations as well.

However, if tariffs are imposed on both the products then it will not be valid

General Equilibrium Analysis of a Tariff - Large Nation

When a large nation imposes a tariff, its offer curve shifts or rotates toward the axis measuring its importable commodity by the amount of the import tariff.

The reason is that for any amount of the export commodity, importers now want sufficiently more of the import commodity to also cover (i.e., pay for) the tariff.

Under these circumstances, in a large nation

A reduction in trade volume will reduce welfare

An improvement in terms of trade will increase welfare

The reduction in the trade volume, by itself, tends to reduce welfare, while the improvement in its terms of trade tends to increase welfare - Whether welfare actually rises or falls depends on the net effect

General Equilibrium Analysis of a Tariff - Large Nation

The Optimum Tariff

An optimum tariff maximizes the net benefit resulting from

the improvement in the nation’s terms of trade against the

negative effect from declining trade volume.

As the terms of trade improve for the imposing nation, those

of the trade partner deteriorate, reducing welfare for the trade

partner.

Trade partner will likely retaliate and impose its own optimum

tariffs.

World as a whole is made worse off as gains from optimum

tariff are less than losses of trade partner.

0

1

2

3

0 1 2 3

export ManufacturesA ; import ManufacturesB

imp

ort

Food A

; e

xport

Food

BofferA no tariff

offerB

offerA tariff

C

D

The ‘optimal’ tariff?

Imposing tariff rotates offer

curve, influences equilibrium

0

1

2

3

0 1 2 3

export ManufacturesA ; import ManufacturesB

imp

ort

Food A

; e

xport

Food

B

offerA no tariff

offerBofferA tariff

trade

indifference

curves

C

D

The ‘optimal’ tariff?

Tangency of trade indifference

curve with foreign offer curve

determines ‘optimal’ tariff

0

1

2

3

0 1 2 3

export ManufacturesA ; import ManufacturesB

imp

ort

Food A

; e

xport

Food

BofferA no tariff

offerB no tariff

offerA tariff

offerB tariff

C

D

E

F

Optimal tariffs and retaliation

Tariff war leads to

bad outcome for all

The Theory of Tariff Structure

The Rate of Effective Protection

Indicates how much protection is actually provided

to domestic producer of import-competing

commodity.

When a nation imposes a lower tariff on imported

inputs than on the final commodity produced with

the inputs, the rate of effective protection exceeds

the nominal tariff rate.

Effective Rate of Protection

Nominal tariff: it is calculated on the value of the final commodity. It is important to consumers because it indicates the increased price.

Effective rate of protection: it is calculated on the domestic value added that takes place in the nation. It is important to the producers because it indicates how much protection is actually provided to the domestic processing and import-competing commodity.

Measurement of the ERP

The Rate of Effective Protection

Calculated as follows:

g = t - aiti

1 - ai

g = rate of effective protection

t = nominal tariff rate on final commodity

ai = ratio of cost of imported input to price of final

commodity with no tariff

ti = nominal tariff rate on imported input

Export Subsidy

An export subsidy can also be specific or ad valorem

A specific subsidy is a payment per unit exported (Korean, 1960s).

An ad valorem subsidy is a payment as a proportion of the value exported.

An export subsidy raises the price of a good in the exporting

country, making its consumer surplus decrease (making its

consumers worse off) and making its producer surplus increase

(making its producers better off). Also lowers the price in foreign

countries.

Also, government revenue will decrease.

In contrast to a tariff, an export subsidy worsens the terms of trade

by lowering the price of domestic products in world markets

Export subsidy

• What happens when Home subsidies the export of its good?

• Subsidy lowers the world price of the export to Ps*, while Home firms see Ps* plus the subsidy, i.e. Ps.

• Home welfare effects:– CS=-(a+b),

PS=+(a+b+c), cost of subsidy= b+c+d+e+f+g.

– Net Loss = (b+d+e+f+g)

– = DWL (b+d) + ToT loss (e+f+g)

Export tax like import tariff

This is called ‘Lerner’s symmetry’

The basic point is almost trivial.

With two goods and only relative prices mattering, the impact on the relative price of raising the numerator is the same as lowering the denominator.

Import tariff raises the internal price of imports relative to exports.

Export tax lowers the internal price of exports to imports (since now domestic export firm sell less abroad and more at home, so home price falls).

Import Tariffs and Distribution of Income Across Countries

When the domestic country imposes an import tariff, the terms

of trade increases and the welfare of the country may increase.

The magnitude of this effect depends on the size of the domestic

country relative to the world economy.

If the country is small part of the world economy, its tariff (or subsidy)

policies will not have much effect on world relative supply and demand,

and thus on the terms of trade.

But for large countries, a tariff rate that maximizes national welfare at

the expense of foreign countries may exist.

Import Quota

An import quota is a restriction on the quantity of a good that may be imported.

This restriction is usually enforced by issuing licenses to domestic firms that import, or in some cases to foreign governments of exporting countries.

A binding import quota will push up the price of the import because the quantity demanded will exceed the quantity supplied by domestic producers and from imports.

Import Quota (cont.)

When a quota instead of a tariff is used to restrict

imports, the government receives no revenue.

Instead, the revenue from selling imports at high prices goes to

quota license holders: either domestic firms or foreign

governments.

These extra revenues are called quota rents.

Voluntary Export Restraint

A voluntary export restraint works like an import quota, except that the quota is imposed by the exporting country rather than the importing country.

However, these restraints are usually requested by the importing country.

The profits or rents from this policy are earned by foreign governments or foreign producers.

Foreigners sell a restricted quantity at an increased price.

Correcting a Trade Deficit

If a country is running a persistent deficit on the trade balance, there are generally two policy options that can be used to correct it.

Exchange rates: Providing the Marshall-Lerner condition holds, a depreciation in the exchange rate will lead to an improvement in the trade balance. In this respect, trade deficits may be self correcting. For example, suppose there is a large increase in imports which leads to a deterioration in the trade balance. However, this also increases the demand for foreign currency, and reduces the demand for domestic currency, so the exchange rate will depreciate any way. Therefore, automatic correction should result.

Correcting a Trade Deficit

Absorption approach: From the national income identity, the trade balance is simply:

For a given level of output, the trade balance can be improved by simply reducing domestic absorption: (C+I+G). These are components of aggregate demand. If these exceed the level of domestically produced output (C+I+G>Y), then the demand for goods and services can only be met by imports.

Likewise, if domestic absorption is less than domestic output (C+I+G<Y), there is no need to import goods and the excess production can be exported.

Any policy which controls the absorption factors – consumption, investment and government spending – will influence the trade balance.

GICYMX

Tariffs have been sharply reduced since World

War II.

Tariffs average 5 percent or less on industrial

products in developed nations, but are higher

in developing nations

GATT/WTO played a major role in this and

also pressure for multilateral institutions

Restriction on tariffs is the core of WTO

arrangement

Changing Tariff Scenario and GATT/WTO

Falling Tariffs – Income Group Wise 1988-2012

Note: WLD=World, LMC=Lower Middle Income Countries, UMC=Upper Middle Income Countries,

HIC=High Income Countries, LIC=Low Income Countries, SAS=South Asia. Tariff figures zero indicate data

are not available

Falling Tariffs – Region/Country Wise 1988-2012

Note: USA=United States, EAS=East Asia and Pacific, EUU=European Union,

LCN=Latin America and Caribbean, SSF=Sub-Saharan Africa, SAS=South Asia,

WLD=World. Tariff figures zero indicate data are not available

Changing Tariff Profiles of India

1997-98 2001-02 2006 2010 2015

Product group Avg.

Tariff

Peak

Tariff

Avg.

Tariff

Peak

Tariff

Avg.

Tariff

Peak

Tariff

Avg.

Tariff

Peak

Tariff

Avg.

Tariff

Peak

Tariff

Sugar Confec. 34.4 60 34.4 60 35.9 60

Beverages and

spirits

114.8 260 96.9 210 70.8 150 70.8 150 68.6 150

Fish products 20.3 60 35 35 29.6 30 29.6 30 29.9 30

Minerals 37.5 45 30.6 55 7.4 10 7.4 10 7.9 15

Metals 32.5 45 32 35

Chemicals 34.6 192 33.8 170 7.9 100 7.8 10 7.9 10

Leather, footwear 39.8 45 32.1 35 10.1 70 10.1 70 10.1 70

Paper/furniture 30.1 45 29.3 35 9.1 10 9.1 10 9 10

Textiles 43.7 55 31.3 35 14.1 122 13.3 106 11.8 147

Apparel 19.9 97 15.1 315 12.3 53

Transport

equipment

41.7 45 40.5 105 14.8 100 15.5 60 19.4 100

Non-elec. mach 27.1 45 25.9 35 7.1 10 7.2 10 7.1 10

Elec Machinery 34.7 45 26.8 35 6.9 10 6.9 10 7.2 10

Petroleum 31.0 35 25 35 9 10 8.2 10 4.9 10

Other Non-agl 37.1 55 30 35 8.8 10 8.7 10 8.8 10

Tariff Structure for Agricultural Goods 2015

Country/Territory Simple average Non ad valorem

duties (Share of

HS 6 digit

subheadings in

per cent)

Maximum duty Number of

distinct duty

rates

Coefficient of

variation

Number

of tariff

lines

Bound MFN

applied

Bound MFN

applied

Bound MFN

applied

Bound MFN

applied

Bound MFN

applied

MFN

applied

Australia 3.4 1.2 1.7 0.9 29 16 36 8 143 172 838

Brazil 35.4 10 0 0 55 35 21 13 31 55 1031

China 15.7 15.6 0 0.3 65 65 38 46 75 75 1164

European Union 10.9 10.7 32 32.2 152 146 1090 822 120 119 2068

South Africa 40.4 8.5 0 13.8 597 115 52 145 131 135 1101

United States 4.8 5.2 41.3 41.5 350 350 818 789 346 324 1684

India 113.5 32.7 0.3 0.3 300 150 19 21 47 88 1496

Japan 16.6 12.9 15.1 11.6 595 595 352 308 230 237 1985

Korea, Republic of 57.9 56.8 5.2 3.2 887 887 183 90 215 240 1737

Norway 133.5 43.6 66.7 43.5 932 932 771 686 124 187 1409

Russian Federation 11 10.8 22.9 23.9 235 235 803 192 122 115 2684

39

Estimates of Total Agricultural Support (US$ million)

2010 2011 2012 2013 2014 2015

Australia 2118.85 2660.79 2168.86 2199.25 1882.27 1547.13

Canada 9347.94 9898.73 9867.56 7661.27 7183.09 6048.56

Japan 64690.6 72956.85 77019.84 60108.77 52025.63 40253.59

Korea 20002.65 23542.19 23323.97 24553.66 24570.64 22932.24

Mexico 7381.02 7897 8217.53 8237.31 8406.2 6480.85

New Zealand 413.89 573.62 581.21 541.25 560.57 485.04

Norway 3977.7 4343.33 4690.66 4356.3 4350.02 3582.73

Switzerland 6463.56 7596.46 7462.56 7095.42 8119.4 8516.11

United States 81751.91 83794.21 89236.87 87892.03 98094.22 76853.51

EU (28 countries) 121484.83 127345.22 127678.69 138201.15 125019.67 104244.85

OECD - Total 336625.71 356891.56 363957.77 351840.01 339838.59 282226.33

Brazil 11849.14 13546.67 8542.02 7609.55 8704.95 5181.18

China 157664.01 136467.25 247753.14 296833.27 313383.8 339708.34

Indonesia 27072.73 22540.12 26945.18 30858.86 35156.73 39585.19

Russia 18946.73 19238.98 16833.77 18557.63 17287.93

South Africa 684.08 933.76 1101.76 958.77 901.87 1052.58

40

Dollar and Kraay (2001)

‘post-1980 globalizers’, or developing countries that have ostensiblybeen more open to trade than others in the period from the early 1980’sto the late 1990’s, have grown faster than ‘non-globalizers’; and growthof trade volumes is associated with higher growth of average incomes

Globalizers identified by them are the top one-third in terms of theirgrowth in trade relative to GDP between 1975-79 and 1995-97

non-globalizers identified by them are actually ‘more globalized’ both interms of trade as a share of GDP (higher trade/GDP ratio) as well astariff barriers (lower average tariffs)

Why post-1980?

Some countries (non-globalizers) already liberalised and no further scope of

liberalisation…but experiencing low growth?

Trade => growth or growth => trade?

Is trade-GDP ratio an appropriate measure of globalisation?

Trade, Tariff and growth

Trade/GDP

Average Tariffs

Growth of Global Economy

Measuring NTBs

produce estimates of price effects and translate them into the ad

valorem equivalent (also referred to as implicit tariffs or implicit

rates of protection)

the frequency index and the coverage ratio:

The frequency index simply captures the percentage of products that are

subject to one or more NTMs.

The coverage ratio captures the percentage of imports that are subject to

one or more NTMs

Price comparison (Before and after)

Quantity impactGravity models

Computable general equilibrium models

Cost-benefit analysis

WTO and NTMs

WTO members have the right to adopt technical regulations, standards and conformity assessment procedures but these must not constitute unnecessary

obstacles to international trade

WTO members have the right to adopt measures to protect human, animal or plant life or health, but these must not constitute unjustifiable discrimination between Members or a disguised restriction on international trade

Similarly, there are agreements on pre-shipment inspection and anti-dumping and a plurilateral agreement on government procurement

Incidence of NTBs

NTBs by Region

Concluding Observations

Tariffs can promote domestic industry and generate revenue in

developing countries as well as dealing with balance of trade

NTMs affect developing countries disproportionately as often

they are far above internationally accepted standards

Standards of course can also make products from other

countries acceptable

India has often benefitted from SPSs/TBTs as its competitor

countries could not meet the standards

Public procurement is often used as development tool by

developing countries