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CHAPTER 4
TARIFFS
CHAPTER OVERVIEW
This chapter discusses the operation and effects of tariffs. The chapter first defines import, export,
protective, revenue specific, ad valorem, and compound tariffs. Next discussed is the effective rate of tariff
protection (nominal and effective tariff rates), calculating effective tariff rates, and the process of tariff
Optimum tariffs and examples of successful and unsuccessful U.S. tariffs are provided. Tariffs have mixed
implications for citizens depending on their industry and position within it. The poor are disproportionally
impacted by tariffs as they are considered economically regressive. The chapter then examines the merits of
trade restrictions. Among the arguments for trade barriers are job creation, protection against cheap foreign
labor, fairness in trade, maintenance of the domestic standard of living, equalization of production costs,
infant-industry argument, and various noneconomic arguments. Tariff-related gains for America is a complex
1. A specific tariff is expressed as a fixed amount of money per unit of the imported product. It is
relatively easy to administer and provides domestic producers with increased protection when prices
fall. However, the degree of protection specific tariffs afford domestic producers varies inversely with
changes in import prices.
2. Two commonly used valuation concepts used by customs appraisers are the free-on-board technique
3. When material inputs or intermediate products enter a country at a low duty while the final imported
product is protected by a high duty, the nominal tariff rate on the final product overstates the effective
rate of protection. The opposite also applies.
4. Developing countries have argued that industrial countries allow raw materials to be imported at low
nominal tariff rates while maintaining high nominal tariff rates on finished products.
5. Consumer surplus (producer surplus) refers to the difference between the amount actually paid by the
buyer (received by the producer) and the maximum (minimum) that the buyer (producer) would have
6. A tariff detracts from the nation's welfare via its consumption effect and protective effect.
7. In general, the size of the welfare responses to tariffs is determined by the impact of the tariffs on
domestic prices and the response of domestic producers and consumers to these price changes.
8. Given a large-country model, a country which imposes a tariff on imports finds its terms of trade
improving. Should the favorable terms-of-trade effect more than offset the deadweight losses resulting
9. Economists generally contend that most arguments for trade restrictions cannot withstand searching
analysis. The infant industry and national security arguments may have some validity, but they must
10. By increasing the price of trade goods, tariffs lower the volume of trade. For the world as a whole,
there is no favorable terms-of-trade effect to offset the trade volume effect.
11. Terms of trade improve, while trade volume declines.
12. Effective tariff rate equals 21 percent.
13. Our trade model predicts that by forcing up the price of oil in the United States, domestic production
would be encouraged, while domestic consumption would be discouraged. Tariffs are unlikely to lead
14. A bonded warehouse is a storage facility for imported goods; it allows imported goods to be put into
storage without the payment of duties. Goods may be later sold overseas duty free or withdrawn for
domestic sale upon payment of import duties. A foreign-trade zone is a site where foreign
15. a. P = $250; Q = 25. Consumer surplus = $3125; producer surplus = $3125.
b. Qs = 10, Qd = 40, Imports = 30. Consumer surplus = $8000; producer surplus = $500.
16. a. $400, 12 tons, 2 tons, 10 tons.
b-2. $600, 10 tons, 4 tons, 6 tons.
b-3. $2200, $200, $200, $600, $1200, $400.
b-4. $350, improve, increase, $300.
b-5. The United States suffers a welfare loss of $100 since the welfare reduction of the
consumption and protective effects ($400) exceeds the welfare gain of the terms-of-trade
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effect ($300)
