International Economics >> The Economics of Tariffs
The Economics of Tariffs
In fact, all countries have had imposed some restriction on their trade. The trade restrictions can be classified as (a) tariffs, and (b) non-tariff restrictions. In this chapter, we will discuss the effects of tariffs on the domestic economy and on the foreign economies.
Meaning and kjnds of tariffs
A tariff is a tax levied on the commodities traded across the border. It can be imposed on both imports and exports. The tax imposed on imports is called import tariff or import duty and the levy on exports is called export tariff or export duty. Tariffs are also called customs. There are four major objectives of import tariffs: (i) raising revenue for the government, (ii) protecting domestic industries against foreign competition, (iii) making domestic prices competitive with import prices, and (iv) securing domestic market for domestic products. Prior to the trade liberalization in the early 1990s, India had imposed prohibitive import duties on almost all imports. The import duties still exist but at reduced rates.
Export tariffs are imposed mainly by the primary producing countries with the objectives of (i) raising revenue, and (ii) maintaining domestic supply or preventing scarcity of exportables in the domestic market. For example, Burma and Thailand taxed their rice exports; Ghana its cocoa export, and Brazil its coffee exports.
Tariffs are classified also on the basis of the nature of tariff rates. Tariff rates may be of the following type: (i) specific rate, (ii) ad valorem rates, or (iii) compounded rate. These rates are explained below.
(i) Specific rate. The specific tariff is levied as a fixed sum of money per unit of imported (or exported) commodity. For example, a country may levy import (or export) duty at the rate of, say, Rs. 5,000 per imported (or exported) PC and
Rs. 50,000 per imported (or exported) car.
(ii) Ad valorem rates. The ad valorem tariff is levied at some percentage rate of the value of the imported/exported commodity, e.g., 20 per cent of PC price and 50 per cent of car price.
(iii) Compounded rate. A compounded tariff is a combination of both specific and ad valorem rates. For example, a country may levy import duty on PC at the fixed rate of Rs. 5000 per unit plus 10 per cent of the PC price, and on car at the rate of Rs. 50,000 per car plus 20 per cent of the car price.
Import tariffs are most important and most prevalent tools of trade control and regulation. They have much wider implications for both domestic and foreign economies. By using import tariffs, countries can influence, the volume, pattern and direction of their foreign trade.
The economic effects of tariffs:
Partial equilibrium analysis
Kindleberger' has listed the following eight kinds of economic effects of tariffs.
1. The Protective effect,
2. The Consumption effect,
3. The Revenue effect,
4. The Distribution effect,
5. The Terms of trade effect,
6. The Competitive effect,
7. The Income effect, and
8. The Balance of Payments effect.
Partial Equilibrium Analysis
The partial equilibrium analysis assumes:
(I) There is only one-country (say, A);
(ii) Country A produces a labour-intensive commodity X and a capital-intensive commodity Y;
(iii) Country A exports commodity X and imports commodity Y;
(iv) The effects of tariff remain confined to the tariff-imposing country; and (v) the effects of tariffs, if any, on other countries are in consequential.
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