TARIFFS AND ITS EFFECTS

Dr. Yogita Beri

Assistant Professor,

Department of Economics,

Vasanta College for Women,

Rajghat Fort (B.H.U),

Varanasi- 221001.

Content

• Introduction
• What is Tariff?
• Types
• Effects
• Partial Equilibrium Effect of Tariff
• Conclusion

Introduction

• International Trade will takes place if it gives benefit to all. If trade is free benefit would be maximise. But nations protect domestic industries through restrictions and regulations. The set of these restrictions and regulations is known as trade policy. Among the barriers or restrictions to trade the most important are tariffs.

Meaning of Tariffs

• A tariff is a tax or duty levied on goods when they enter and leave the national frontier or boundary. A tariff refers to import duties and export duties. Import tariff is common tariff and export tariff is a less common tariff. The main objective of tariff are:
• Increase production
• Increase employment
• Increase government revenue

Classification of Tariff

1. Classification on the basis of criterion for imposition:
1. Ad Valorem Duty: It is levied as a percentage of the total value of the imported commodity.
2. Specific Duty: It is levied per physical unit of the commodity.
3. Compound Duty : It is a combination of ad valorem and specific duty.

II. Classification on the basis of purpose:

• Revenue Tariff
• Protective Tariff

III. Classification on the basis of discrimination

• Non-discriminatory Tariff
• Discriminatory Tariff
• General and Conventional
• Maximum and Minimum

IV. On the basis of products:

• Import duties
• Export duties

V. On the basis of retaliation

• Retaliatory tariff
• Countervailing duties

Effects of Tariff

• Tariff has variety of effects depends upon their power to reduce imports.

General Equilibrium

• It analysed the effect from the standpoint of the economy as a whole.

Partial Equilibrium

• It analysed from the point of view of a particular good or market.

Effect under Partial Equilibrium

The effect of tariff under partial equilibrium analysis relate to small industry in a small country.

Its Assumptions:

• (i) The demand and supply curves of the given commodity are concerned with home country that imposes import tariff.
• (ii) The given demand and supply curves remain constant.
• (iii) There is no change in consumers’ tastes, prices of other commodities and money income of the consumers.
• (iv) There is an absence of technological improvements, externalities and other factors that result in changes in cost conditions.

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• (v) No tariff is imposed by the home country on the import of materials that are required for producing the given commodity.
• (vi) Imported product and home-produced product are perfect substitutes.
• (vii) There is no change in the foreign price of the commodity.
• (viii) There is an absence of transport costs.
• (ix) The foreign supply curve of commodity is perfectly elastic.
• (x) Domestic production of commodity takes place at increasing costs.

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• Prof. Kindelberger has mentioned eight effects of tariff in a partial equilibrium approach. These include:
• 1. Protective or Production Effect
• 2. Consumption Effect
• 3. Revenue Effect
• 4. Redistribution Effect
• 5. Terms of Trade Effect
• 6. Competitive Effect
• 7. Income Effect
• 8. Balance of Payments Effect.

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1. Protective or Production Effect:�

• The imposition of tariff may be intended to protect the home industry from the foreign competition. As tariffs restrict the flow of foreign products, the home producers find an opportunity to increase the domestic production of import substitutes. That is why Ellsworth termed the protective or production effect of tariff as the import-substitution effect.

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2. Consumption Effect:

The imposition of import duty on a particular commodity has the effect of reducing consumption and also the net satisfaction of the consumers.

3. Revenue Effect:

• The imposition of import duty provides revenues to the government. The revenue receipts due to tariff signify a revenue effect.

4. Redistribution Effect:

• The imposition of tariff, on the one hand, causes a reduction in consumer’s satisfaction and, on the other hand, provides a larger producer’s surplus or economic rent to domestic producers and revenues to the government. Thus tariff leads to redistributive effect in the tariff-imposing country.

• 5. Terms of Trade Effect:

The traditional theorists believed that tariff led to an improvement in the terms of trade of the tariff-imposing countries. The modern theorists, however, do not hold such a simplistic view. In their opinion, the terms of trade, consequent upon the imposition of tariff, depend upon the elasticities of demand and supply of products of the two trading countries.

• If the foreign supply of a good is perfectly elastic or if the foreign suppliers are ready to supply the product at a constant price, the imposition of tariff is not likely to improve the terms of trade for the tariff-imposing country. In case the foreign supply of a good is not perfectly elastic, the imposition of tariff can have varying effects upon the terms of trade of the tariff-imposing country depending upon the elasticities of demand and supply in the two trading countries.

• 6. Competitive Effect:
• The imposition of tariff, can facilitate the growth of an infant industry which otherwise is not in a position to face the foreign competition. As tariff makes the foreign product relatively more costly, the domestic infant industry finds opportunity to grow behind the protective shield.
• Thus tariff increases the competitive power of the industries of tariff-imposing country. After the infant industry becomes mature enough to face the foreign competition, tariff may be removed.
• The increase in the competitive power of the domestic industries through tariff is called as the competitive effect. The fears are, however, expressed that protection breeds inefficiency and promotes the growth of monopolies.

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7. Income Effect:

• The imposition of tariff reduces the demand for foreign products. The amount of money not spent on imported goods may either be spent on the home-produced goods or saved. If there is the existence of surplus productive capacity in the home country, switch of expenditure from foreign to home-produced goods will lead to a rise in production, employment and income.

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8. Balance of Payments Effect:

• When tariff is imposed by a country upon foreign products, the home-produced goods become relatively cheaper than the imported goods. The price effect caused by tariff, on the one hand, reduces imports from other countries and on the other hand, causes increased production and purchase of home- produced goods. That leads to a reduction in the balance of payments deficit of the home country.

Conclusion

Under partial equilibrium most of the effects

are favourable from the point of view of tariff

imposing country.