The Instruments of Trade Policy

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The Instruments of Trade Policy
Tariffs definitions and measurement Nontariff
Barriers From quotas to administrative
regulations
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Import Tariff Specific Tariff

• Definition
• fixed monetary tax per physical unit of the good
  imported
• Benefit ease of collection
• Cost
• tariffs effectiveness in protecting domestic
  industry falls as price of imported good rises
• Why? because tariff becomes a smaller and
  smaller portion of the total cost of the good as
  its price rises

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Import Tariff Ad Valorem Tariff

• Definition
• a tax measured as a percentage of the price of
  the imported good
• Benefit
• maintains protective value as price increases
• Cost
• customs officials must determine value of good
  (whether stated price on good is correct)
• this can lead to overvaluation of good - more
  protection than desired by policy makers, and/or
  corruption

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Other Features of Tariff Schedules

• Preferential Duties
• tariffs applied to imports from particular group
  of countries
• countries are charged a lower tariff than
  countries outside the group
• Generalized System of Preferences
• developed countries charge lower tariffs for
  specific imports from developing countries
• list of goods chosen by developed countries
  (textiles and clothing not included)

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Other Features of Tariff Schedules

• Most-favoured-nation treatment (MFN)
• WTO principle
• a country must give all countries who are part of
  the WTO the same tariff treatment as the
  most-favoured nation with which the country is
  trading
• example If U.S. and Canada lower tariffs on
  goods, then the tariff should be lower for all
  countries who import the good to Canada or the
  U.S.
• MFN has not been followed when countries sign
  free trade deal

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Other Features of Tariff Schedules

• Offshore Assembly Provisions (OAP)
• an import tariff applies to the entire price of a
  good
• under OAP, the import tariff applies only to the
  part of the good that is produced abroad
• Example good with 10 tariff
• a goods components are produced at home, and
  cost 10
• the good is sent to a second country for
  assembly, assembly costs 12
• Tariff without OAP tariff 12x0.10 1.20
• with OAP tariff 2x0.10 0.20

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Measurement of Tariffs

• Unweighted average tariff
• given 3 goods with specified tariffs
• A 10 B 15 C 20
• Average 10 15 20 15 3
• Disadvantage
• this tariff doesnt take into account the
  quantity of goods to which each of these tariffs
  are applied,
• if almost no good C is imported average MAY
  overstate countrys level of protection

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Measurement of Tariffs

• Weighted-average tariff (WAT)
• each goods tariff is weighted by the value of
  imports to which it is applied
• Example A 10 B 15 C 20
• Quantity A 500 B 200 C 100
• WAT 0.10(500) 0.15(200) 0.20(100)
  100 0.125
• 500200100 800
• Problem
• WAT puts too little weight on goods facing a high
  tariff
• For example, a good facing a 200 tariff may not
  be imported. (This is called a PROHIBITIVE
  TARIFF).
• The WAT underestimates the countrys level of
  protection.

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Effective Rate of Protection (ERP)

• Measure of how a countrys tariff structure
  protects domestic industries
• compares value added (VA) under protection with
  value added with free trade
• NOTE
• value added is the value of output less the value
  of the inputs used in production
• for ERP, we therefore need to know tariffs on
  final goods (produced at home and imported) and
  tariffs on imported inputs

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Effective Rate of Protection (ERP)

• ERP VA under protection - VA with free
  trade VA under free trade
• Example
• PF (PF) price of final good w/o tariff (with
  tariff)
• PA(PA) price of input A without tariff (with
  tariff)
• PB(PB) price of input B without tariff (with
  tariff)
• Let PF1,000, PA500, PB 200
• Let tF 0.10, tA 0.05, tB0.08
• VA 1000 - 500 - 200 300
• VA 1000x1.10 - 500x1.05 - 300x1.08 359
• EFR (359-300)/300 0.197 or 19.7

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Effective Rate of Protection (ERP)

• In example, the nominal tariff on the final
  good is 10. This is the tariff that would be
  quoted by the home country.
• However, the EFR on the same good is 19.7. The
  result is due to lower tariff on production
  inputs than on the final product
• If a country uses this rule in setting tariffs,
  it is said to have an escalated tariff
  structure

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Effective Rate of Protection (ERP)

• In General
• Note
• On clothing U.S. has 27.8 nominal tariff and
  50.6 EFR
• On textiles U.S. has 14.4 nominal tariff ,
  but a 28.3 EFR

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Nontariff Barriers (NTBs)

• Export tax
• tax on exports, usually to raise revenue for
  government
• can be either specific or ad valorem
• export tax reduces size of international trade
• Export subsidy
• negative export tax
• attempts to increase the flow of trade
• distorts the pattern of trade from that of
  comparative, and can be very costly to the
  exporting country government
• subsidies lead to battles over unfair trade

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Nontariff Barriers (NTBs)

• Import quotas
• limit on the quantity of goods that can be
  imported
• limit causes the price at home to increase, which
  gives the same effect as a tariff
• if demand for the good increases, a fixed import
  quota has the same effect as an ever-rising tariff

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Nontariff Barriers (NTBs)

• Voluntary Export Restraints (VERS)
• alternative to import quota
• importing home country pressures exporting
  country to restrain its exports to the home
  market
• usually such agreements are made with the threat
  of quotas being imposed if exports are not
  limited
• Government Procurement Provisions
• government often tells its bodies to buy home
  produced goods unless the import is significantly
  cheaper than the home produced competing good
• this has the same effect as a tariff

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Nontariff Barriers (NTBs)

• Domestic content provisions
• products must contain a certain amount of value
  added in the home country to sold in the home
  country
• very restrictive policy
• usually seen in developing countries trying to
  grow through import substitution
• Value-added tax (VAT, also Canadian GST)
• alternative to sales tax, but each level of
  production receives a tax rebate on inputs,
  eliminating double taxation
• goods (and inputs) are taxed when imported, but
  taxes are rebated if the final good is exported

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Nontariff Barriers (NTBs)

• Administrative Classification
• goods have different tariffs - a good may be
  classified as a high-tariff good to increase
  protection to local market
• Restrictions on Trade in Services
• restrictions on banking, insurance,
  transportation, all lower the volume of trade
  (i.e. only local banks may take personal
  deposits, only Canadian airlines may fly between
  Canadian cities

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Nontariff Barriers (NTBs)

• Trade-Related Investment Measures
• performance requirements forcing a foreign
  investor to use domestic inputs, or export final
  product
• Additional Restrictions
• foreign exchange controls, import licences
• advance deposit requirements - firm has to
  deposit funds with government equal to a percent
  of future import (to be refunded when import
  purchased)
• Domestic Policies
• health, environmental, safety standards, domestic
  subsidies, stumpage fees, labelling, patents - do
  they all need to be harmonized? (made identical? )

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