International economics chapter 6 trade policy

Defining tariffsA tariff is a tax duty levied on products as they move between nations Transaction/ movement of goods – Import tariff - levied on imports the country Main Purpose produce

Lecturer: PhD Tran Nguyen Chat Division: International Trade

Email: trannguyenchat.cs2@ftu.edu.vn

FOREIGN TRADE UNIVERSITY HOCHIMINH CITY CAMPUS

INTERNATIONAL ECONOMICS

Chapter 6

Instruments of Trade Policy

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How Do Governments Intervene In Markets?

Governments use various methods to intervene in markets including tariff and non-tariff measures

Tariffs- taxes levied on imports that effectively raise the cost of imported products relative to domestic products

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How Do Governments Intervene In Markets?

Tariffs

➢ increase government revenues

➢ force consumers to pay more for certain imports

➢ are pro-producer and anti-consumer

➢ reduce the overall efficiency of the world economy

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Defining tariffs

A tariff is a tax (duty) levied on products as they move between nations

Transaction/ movement of goods

– Import tariff - levied on imports

the country

Main Purpose

producers from competition

government budget (no longer important in industrial countries)

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Costs and Benefits of Tariffs

• A tariff raises the price of a good in the importing country, so we expect it to hurt consumers and benefit producers there

• In addition, the government gains tariff revenue from

a tariff

• How to measure these costs and benefits?

• We use the concepts of consumer surplus and producer surplus

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Tariff welfare effects

• Consumer surplus measures the amount that a

consumer gains from a purchase by the difference in the price he pays from the price he would have been willing to pay

– The price he would have been willing to pay

is determined by a demand (willingness to buy) curve.

– When the price increases, the quantity demanded decreases as well as the consumer surplus.

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Tariff welfare effects

• Producer surplus measures the amount that a

producer gains from a sale by the difference in the price he receives from the price he would have been willing to sell at

– The price he would have been willing to sell at is determined by a supply (willingness to sell) curve.

– When price increases, the quantity supplied increases as well as the producer surplus.

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Costs and Benefits of Tariffs

• A tariff raises the price of a good in the importing

country, making its consumer surplus decrease (making its consumers worse off) and making its producer surplus increase (making its producers better off)

• Also, government revenue will increase

Consumer and producer surplus

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Tariff trade and welfare effects

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Who pays for import restrictions?

• Domestic consumers face increased costs – Low income consumers are especially hurt by tariffs on low-cost imports

• Overall net loss for the economy (deadweight loss)

• Export industries face higher costs for inputs

• Cost of living increases

• Other nations may retaliate, further restricting trade

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Arguments for trade restrictions

• Job protection

• Protect against cheap foreign labor

• Fairness in trade - level playing field

• Protect domestic standard of living

• Equalization of production costs

• Infant-industry protection

• Political and social reasons

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Why Do Governments Intervene In Markets?

There are two main arguments for government intervention in the market

interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers)

overall wealth of a nation – benefits both producers and consumers

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What Are The Political Arguments For Government Intervention?

1 Protecting jobs - the most common political

reason for trade restrictions

results from political pressures by unions or industries that are "threatened" by more efficient foreign producers, and have more political clout than consumers

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What Are The Political Arguments For Government Intervention?

2 Protecting industries deemed important for national security - industries are often protected because they are deemed important for national security

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What Are The Political Arguments For Government Intervention?

3 Retaliation for unfair foreign competition- when governments take, or threaten to take, specific actions, other countries may remove trade barriers

➢ if threatened governments do not back down, tensions can escalate and new trade barriers may

be enacted

➢ risky strategy

4 Protecting consumers from “dangerous”

products – limit “unsafe” products

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What Are The Political Arguments For Government Intervention?

5 Furthering the goals of foreign policy -preferential trade terms can be granted

to countries that a government wants

to build strong relations with

trade policy can also be used to punish rogue states

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What Are The Political Arguments For Government Intervention?

individuals in exporting countries – through trade policy actions

international trade is associated with a decline in environmental quality

➢concern over global warming

➢enforcement of environmental regulations

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What Are The Economic Arguments

For Government Intervention?

1 The infant industry argument - an industry should be protected until it can develop and

be viable and competitive internationally

➢ accepted as a justification for temporary trade restrictions under the WTO

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What Are The Economic Arguments

For Government Intervention?

2 Strategic trade policy – first-mover advantages can be important to success

➢ governments can help firms from their countries attain these advantages

➢ governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage

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Politics of protectionism

• “Supply” of protectionism (trade policy) depends on:

– the cost to society of restricting trade – the political importance of the import-competing industries

– Magnitude of the adjustment costs from free trade – Public sympathy for those sectors hurt by free trade

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Politics of protectionism

• “Demand” for protectionism depends on:

– The amount of the import-competing industry’s comparative disadvantage

– The level of import penetration – The level of concentration in the affected sector – The degree of export dependence in the sector

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When Should Governments Avoid Using Trade Barriers?

Paul Krugman argues that strategic trade policies aimed at establishing domestic firms

in a dominant position in a global industry are:

beggar-thy-neighbor policies that boost national income at the expense of other countries

countries that attempt to use such policies will

When Should Governments Avoid Using Trade Barriers?

Krugman argues that since special interest groups can influence governments, strategic trade policy is almost certain to be captured

by such groups who will distort it to their own ends

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Export-import goods tariff nomenclature (schedule):

o Each country has an export-import goods tariff nomenclature/Schedule

o VN tariff is based on HS

o There are export tax rate & import tax rate

Tariffs

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Types of tariff

• Specific tariff

– Fixed monetary fee per unit of the product

• Ad valorem tariff

– Levied as a percentage of the value of the product

• Compound tariff

– A combination of the above, often levied on finished goods whose components are also subject to tariff if imported separately

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Effective rate of protection

• The impact of a tariff is often different from its stated amount

• The effective tariff rate measures the total increase in domestic production that the tariff makes possible, compared to free trade

– Domestic producers may use imported inputs or intermediate goods subject to various tariffs, which affects the calculation

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Effective rate of protection

• When tariff rates are low on raw materials and

components, but high on finished goods, the effective tariff rate on finished goods is actually much higher than it appears from the

nominal rate

• This is referred to as tariff escalation

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Tax calculation for exported goods

AMOUNT OF TAX = VALUE OF GOODS X TAX RATE (%)

Tariffs

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Tax calculation for imported goods

Percentage tax rate:

Amount of tax = Value of goods X tax rate (%)

Value of goods → transaction value → 6 methods

Specific tax rate:

Amount of tax = Quantity of goods X tax rate

Compound tax rate

Tariffs

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Tax rates for imported goods:

a) Preferential tax rates (MFN tax rate):

Preferential tax rates are the rates applicable to imported goods originated from countries or groups of countries which have reached agreements on most-favored-nation (MFN)

treatment in trade relations with Vietnam

Preferential tax rates are specified for every goods item in the Preferential Import Tariffs

Tariffs

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Tax rates for imported goods :

b) Specially preferential tax rates (FTA tax rate):

Specially preferential tax rates are the rates applicable

to imported goods originated from the countries or groups of countries those have reached agreements with Vietnam onspecially preferential import tax rates under the institution of free trade areas, tariffs alliance, or aiming to facilitate border trade exchanges

and other cases of specially preferential treatment

Specially preferential tax rates shall be applicable specifically to every goods item according to the provisions of the agreements

Tariffs

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Tax rates for imported goods :

c) Ordinary tax rates:

• Ordinary tax rates are the rates applicable to imported goods originated from countries or groups

of countries with which Vietnam has not reached any agreement on MFN or on specially preferential import tax rates.

• Ordinary tax rate is 50% (fifty percent) higher than the preferential tax rate of each goods item specified

in the Preferential Import Tariffs Nomenclature (or

Tariffs

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Concept:

• The Customs value on imported goods is determined mainly for the purpose of applying ad valorem duties

• Constitutes the taxable basis for Customs duties

• An essential element for trade statistics, for monitoring quantitative restrictions, tariff preferences and for collecting internal national taxes, etc

Customs Valuation

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The WTO Valuation Agreement:

• The Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (GATT 1994)

• Establishes a Customs valuation system that primarily bases the Customs value on

the transaction value of the imported

goods

• The price actually paid or payable for the goods when sold for export to the country

of importation, plus certain adjustments

Customs Valuation

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Valuation methods:

1 The transaction value of the imported goods

2 The transaction value of identical goods;

3 The transaction value of similar goods;

4 The deductive value method;

5 The computed value method;

6 The fall-back method.

Customs Valuation

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How Do Governments Intervene In Markets?

Governments use various methods to intervene

in markets including tariff and non-tariff measures

Non-Tariffs measures (NTMs) are policy measures — other than ordinary customs tariffs — that can potentially have an economic effect on international trade in goods, changing quantities traded, or prices or both

→Trends of tariffication

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Non-tariff measures

Some popular NTMs:

• Quantitative restrictions: prohibition, quota, import licensing (non-automatic license)

• Trading rights

• Para-tariff measures: surcharge, customs valuation

• Price control

• Technical measures (Technical Barriers to Trade – TBT)

• Distribution restrictions

• Trade-related investment measures

• Administrative procedures

• Trade remedies (anti-dumping, countervailing, safeguard measures)

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1 Agriculture (AoA)

2 Sanitary and Phytosanitary Measures (SPS)

3 Textiles and Clothing Note (terminated on 1 Jan 2005)

4 Technical Barriers to Trade (TBT)

5 Trade-Related Investment Measures (TRIMs)

6 Anti-dumping (Article VI of GATT 1994) (ADA)

7 Customs valuation (Article VII of GATT 1994) (ACV)

8 Preshipment Inspection

9 Rules of Origin (ROO)

10 Import Licensing (ILP)

11 Subsidies and Countervailing Measures (SCM)

12 Safeguards

13 Trade facilitation (TFA) Government procurement: a plural agreement

WTO AGREEMENTS: GATT 1994

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Non-tariff measures

Sanitary and Phytosanitary Measures:

• Measures that are applied to protect human

or animal life from risks arising from:

additives, contaminants, toxins or disease-causing organisms in food.

• Geographical restrictions on eligibility:

Imports of dairy products from countries.

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Non-tariff measures

Technical Barriers to Trade:

• Measures referring to technical regulations, and procedures for assessment of conformity with technical regulations and standards.

• Labelling requirements Eg: Refrigerators need to carry a label indicating their size, weight and electricity consumption level.

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Import quotas

• Quotas are a restriction on the quantity of a

good that may be imported in any one period (usually below free-trade levels)

• Global quotas restrict the total quantity of an

import, regardless of origin

• Selective quotas restrict the quantity of a good

coming from a particular country

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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

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Import Quota

• 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.

Tariff-rate quota

• The tariff-rate quota is a two-tiered tariff

– A specified number of goods (up to the quota limit) may be imported at one (lower) tariff rate, while imports in excess of the quota face a higher tariff rate

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Tariff-rate quota: trade & welfare effects

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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

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Local Content Requirement

• A local content requirement is a regulation that

requires a specified fraction of a final good to be produced domestically

• It may be specified in value terms, by requiring that

some minimum share of the value of a good represent domestic valued added, or in physical units

• Often has the effect of forcing lower-priced imports

to include higher-cost domestic components or be assembled in a higher-cost domestic market

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Local Content Requirement

• From the viewpoint of domestic producers of inputs, a local content requirement provides protection in the same way that an import quota would.

• From the viewpoint of firms that must buy domestic inputs, however, the requirement does not place a strict limit on imports, but allows firms to import more if they also use more domestic parts.

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Local Content Requirement

• Local content requirement provides neither

government revenue (as a tariff would) nor quota rents

• Instead the difference between the prices of

domestic goods and imports is averaged into the price of the final good and is passed on to consumers

Subsidies

• Domestic subsidy

– Payments made to import-competing producers to raise the price they receive above the market price

• Export subsidy

– Payments and incentives offered to export producers intended to raise the volume of exports

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