CHAPTER 4
TARIFFS
CHAPTER OVERVIEW
This chapter discusses the operation and effects of tariffs. The chapter first defines import tariff, export tariff,
specific tariff, ad valorem tariff, and compound tariff. Next discussed is the effective rate of tariff protection and
the process of tariff escalation. Attention then turns to postponing import duties via bonded warehouses and
foreign trade zones.
After completing this chapter, the student should be able to:
• Define specific tariff, ad valorem tariff, and compound tariff.
• Discuss the effective rate of tariff protection and the process of tariff escalation.
BRIEF ANSWERS TO STUDY QUESTIONS
1. A specific tariff is expressed as a fixed amount of money per unit of the imported product. An ad
2. Two commonly used valuation concepts used by customs appraisers are the free–on-board technique and
the cost-insurance-freight technique.
3. When material inputs or intermediate products enter a country at a low duty while the final imported
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rate of protection. The opposite also applies.
5. Consumer surplus (producer surplus) refers to the difference between the amount actually paid by the
6. A tariff detracts from the nation’s welfare via its consumption effect and protective effect.
8. Given a large-country model, a country which imposes a tariff on imports finds its terms of trade
9. Economists generally contend that most arguments for trade restrictions cannot withstand searching
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.
12. Effective tariff rate equals 21 percent.
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 Goods may be later sold overseas duty free or withdrawn for
15. a. P = $250; Q = 25. Consumer surplus = $3125; producer surplus = $3125.
16. a. $400, 12 tons, 2 tons, 10 tons.
b-1. SUS+F shifts upward by the amount of the tariff, $250.
b-2. $600, 10 tons, 4 tons, 6 tons.