International Business Chapter 13 Because Under Mfn Any Tariff Reduction One Partner Extended All Others With

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CHAPTER 13

THE INSTRUMENTS OF TRADE POLICY

Learning Objectives:

■ Describe the different features of tariffs employed to influence imports.

■ Discuss policies used to affect exports.

■ Summarize the different nontariff policies used to restrict trade.

I. Outline

Introduction

– In What Ways Can Governments Interfere with Trade?

Import Tariffs

– Specific Tariffs

– Ad Valorem Tariffs

– Other Features of Tariff Schedules

– Measurement of Tariffs

Export Taxes and Subsidies

Nontariff Barriers to Free Trade

– Import Quotas

– Additional Restrictions

– Additional Domestic Policies That Affect Trade

Summary

II. Special Chapter Features

In the Real World: U.S. Tariff Rates

In the Real World: The U.S. Generalized System of Preferences

In the Real World: Nominal and Effective Tariffs in the European Union

III. Purpose of Chapter

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The purpose of the chapter is to introduce the wide variety of trade-distorting instruments

that exist in practice, as well as to acquaint students with particular policy concepts such as

most-favored-nation treatment (normal trade relations) and the effective rate of protection. Once

the instruments are understood, the stage is set for the discussion of their market and welfare

implications in Chapter 14.

IV. Teaching Tips

A. In this chapter we have refrained from saying much about welfare – reserving that

discussion for Chapter 14. The chapter begins with five examples of the instruments of trade

B. In the discussion of GSP, it is useful to spend more time than we do in the text on the fact

that there are ceilings to the quantities of imports that can come into the United States (although

not for the “least developed” countries) and that the range of goods permitted is rather limited.

Also, the “graduation” issue seems of some interest to students.

C. For some reason, students have trouble grasping the ERP concept. It helps to make clear

D. In the discussion of ERP, it is important to note that the tariffs on inputs raise the

domestic price of identical home-produced inputs, too. Some texts imply that the inputs used in

E. Pertaining to the discussion of VAT, some students who have traveled in Europe may

have received VAT rebates. Reference to this can help the class understand the discussion.

F. The Scott Bradford study summarized on pages 276-277 provides a look at the impact of

protection in a more practical, real manner than is perhaps provided simply by observing actual

tariff rates.

V. Answers to End-of-Chapter Questions and Problems

1. Preferential duties discriminate by trade partner in the importation of any given product,

while the objective of MFN treatment (or normal trade relations) is to be nondiscriminatory.

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2. Those industries and residents of a country who can benefit from protection are

continuously seeking mechanisms by which their well-being can be enhanced. As tariffs have

been reduced through international negotiations, these economic agents have sought to preserve

their protected status by pushing for legislation and regulations regarding other barriers (NTBs)

not covered by the negotiations.

3. Value added under free trade is $1,000 – ($300 + $500) = $200. In the small country

4. Probably not. For nominal tariffs, the problem of under- (over-) representation of high-

(low-) tariff goods prevents precise measurement by a weighted-average tariff, and an

unweighted-average tariff will obviously only be approximate. The use of world weights is not

satisfactory conceptually, as it does not embody the country’s actual trade pattern. For effective

5. The ERPs for the country’s final goods industries will increase, meaning that these

6. (a) The unweighted-average nominal tariff rate is equal to:

= 1.42/10 = 0.142 or 14.2 percent

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(b) The weighted-average nominal tariff rate is:

7. (a) The new unweighted-average nominal tariff rate is equal to:

(b) The new weighted-average nominal tariff rate is equal to:

(0.10)($500) + (0.05)($750) + (0)($625) + (0.30)($375) + (0.02)($250) + (0.025)($500)

8. A tariff will clearly result in a domestic price that is higher than the world price, and any

nontariff barrier will do the same thing. Although we do not have estimates of the size of the

9. Both claims were correct because different tariff rate concepts were being utilized in the

statements. Evidence suggests that, at the time, the United States in general had higher effective

1. Although a given set of tariff rates exists for a given country, not all of its trading

2. Industries with the highest level of nominal tariff rates on their competing imports do not

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necessarily receive the greatest incentive to expand domestic production. Explain why this is so

and how you might go about arriving at a more revealing measure of tariff-based incentives for

expanding production.

3. If offshore assembly provisions were extended to include more goods, what would this do

to the actual level of protection provided by a country’s nominal tariff schedule? Explain. If the

4. Suppose that a country has a nominal tariff rate of 10 percent on good A and imports

$100,000 of good A, has a nominal rate of 5 percent on good B and imports $120,000 of good B,

5. There is often heated debate over what qualifies as a nontariff barrier to trade and how

large any trade-distorting effects of NTBs are. Why might this be so? Why do you suppose such

debate is less common for tariffs?

6. How would you go about calculating an “implicit” or “equivalent” nominal tariff rate on

an imported good that faces a nontariff barrier such as an import quota? What difficulties would

you encounter?

7. (a) Suppose that a country has a nominal tariff rate of 10 percent on good A and imports

$1,000 of good A, has a nominal rate of 5 percent on good B and imports $1,400 of good

B, and has a nominal tariff rate of 15 percent on good C and imports $600 of good C.