ARSI UNIVERSITY

School of Business and Economics

Department of Economics
Lecture Note on
International Economics-I
Behailu Zenebe
Asella – Ethiopia
29 March 2025 International Economics-I Lecture Note
29 March 2025 International Economics-I Lecture Note Slide #2
 Introduction
⇰In the preceding discussions we have seen that free
trade maximizes world output and benefits all
nations. (Read on cases for and against free trade)
⇰However, practically nations impose some restrictions
on the free flow of international trade.
⇰Since these restrictions and regulations deal with the
nation’s trade or commerce, they generally known as
TRADE OR COMMERCIAL POLICIES.
⇰The most important type of trade restriction has
historically been the TARIFF. In this chapter we also
deal with tariffs and other trade restrictions.
29 March 2025 International Economics-I Lecture Note Slide #3
 3.2. Tariff and Non-Tariff Barriers
3.2.1. TARIFF BARRIERS
⇰A tariff is a tax or duty levied on the traded
commodity as it crosses a national boundary.
⇰An import tariff is a duty on the imported
commodity, while an export tariff is a duty on
the exported commodity.
⇰Import tariffs are more important than export
tariffs, and most of the discussions below will
emphasize on import tariffs.

29 March 2025 International Economics-I Lecture Note Slide #4

 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰Developing nations rely heavily on export tariffs
to raise revenues because of their ease of
collection.
⇰Conversely, industrial countries invariably impose
tariffs or other trade restrictions to protect some
industry, while using mostly income taxes to raise
revenues.
⇰Tariffs can be divided into the following three
types:

29 March 2025 International Economics-I Lecture Note Slide #5

 3.2. Tariff and Non-Tariff Barriers…cont’d
Ad Valorem Tariff: is expressed as a fixed
percentage of the value of the traded commodity.
Example: 10 percent ad valorem tariff on a product
would result in the payment to customs officials of the
sum of $10 on each $100 imported product and the sum
of $20 on each $200 imported product.
Specific Tariff: a fixed sum per physical unit of the
traded commodity.
Example: a specific tariff of $10 on imported product
means that customs officials collect the fixed sum of $10
on each imported product regardless of its price.
29 March 2025 International Economics-I Lecture Note Slide #6
 3.2. Tariff and Non-Tariff Barriers…cont’d
 Compound Tariff: is a combination of an ad
valorem and a specific tariff.
Example: a compound duty of 5 percent ad valorem and
a specific duty of $10 on imported product would result
in the collection by customs officials of the sum of $15 on
each $100 product and $20 on each $200 imported
product.

29 March 2025 International Economics-I Lecture Note Slide #7

 3.2. Tariff and Non-Tariff Barriers…cont’d
EFFECTS OF TARIFF
EFFECTS ON DOMESTIC PRODUCERS
⇰Intuition suggests that domestic producers that
compete against imports will benefit from a tariff.
⇰If the government impose tariff on imports, the
domestic price of the imported product will rise.
⇰Domestic producers can then expand their own
production and sales, raise the price they charge.
⇰Thus, tariff would make domestic producers
better off.
29 March 2025 International Economics-I Lecture Note Slide #8
 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰To see the effect of tariff on producers we use the
concept of producer surplus.
⇰Consider the graph below - a demand – supply
view of the small nation market for bicycles.

29 March 2025 International Economics-I Lecture Note Slide #9

 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰In the free-trade situation shown in the above
figure, bicycles are imported freely at the given
world price of $300.
⇰At this price consumers buy S0 bikes a year from
domestic suppliers and import M0 bikes a year,
buying a total of D0 = S0 + M0 bikes.
⇰Recall that producer surplus is the amount that
producers gain from being able to sell bikes at the
going market price.
⇰Graphically, producer surplus is the area above the
supply curve and below the market price line.

29 March 2025 International Economics-I Lecture Note Slide #10

 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰The supply curve indicates the marginal cost of
each additional unit.
⇰A competitive producer will supply an additional
unit as long as the price (the extra revenue)
covers the marginal (or extra) cost.
⇰From the above figure we see that producers
receive the area of triangle CBA as producer
surplus.
⇰Now imagine a tariff of 10% on imported bikes.

29 March 2025 International Economics-I Lecture Note Slide #11

 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰Because this is a small country, foreign exporters
insist on continuing to receive $300 for each bike
they export.

Look at the
graph

29 March 2025 International Economics-I Lecture Note Slide #12

 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰So the 10% tariff is $30 per bike, and this
amount is passed on to consumers. The
domestic price of imported bikes rises to $330.
When the tariff is imposed, domestic
producers can also raise the price that they
charge for their bikes.
⇰When the tariff drives the domestic market
price to $330, domestic firms respond by
raising their output and sales, as long as the
higher price exceeds the marginal cost.
29 March 2025 International Economics-I Lecture Note Slide #13
 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰When the tariff is imposed, domestic
producers expand output by 0.2 million
units, from S0 to S1.
⇰With the tariff in place, domestic producer
surplus is area g + a
⇰As a result of the tariff, domestic producer
surplus increases by area a, which equals
$21 million per year.

29 March 2025 International Economics-I Lecture Note Slide #14

 3.2. Tariff and Non-Tariff Barriers…cont’d
EFFECTS ON DOMESTIC CONSUMERS
⇰Intuition also suggests that buyers of a good
imported from abroad will be hurt by a tariff.
⇰Domestic consumers end up paying a higher
price, buying less of the product, or both.
⇰We now use the concept of consumer surplus.
⇰It is the amount that consumers gain from being
able to buy goods at the going market price.
⇰Graphically, consumer surplus is the area below
the demand curve and above the market price.

29 March 2025 International Economics-I Lecture Note Slide #15

 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰Consider the graph below:

29 March 2025 International Economics-I Lecture Note Slide #16

 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰The free-trade situation (before the tariff is
imposed) domestic consumers buy D0 bikes at the
world price of $300.
⇰According to the demand curve in the above
figure, some consumer is willing to pay $540 for
the first bike (at point F).
⇰At the market price of $300, the consumer
receives a net gain (consumer surplus) that first
unit (area FEC)

29 March 2025 International Economics-I Lecture Note Slide #17

 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰Now if the government imposes a tariff of 10% on
imported bikes the price raises such that
consumers must pay higher price for bikes (both
for imported and domestically produced) to $330.
⇰By raising the price to $330, the tariff forces
consumers who were buying 1.6 million bikes to
make a decision – some keep buying and others
stop buying.
⇰As a result o tariff imposition quantity demanded
falls from D0 to D1, a decrease of 0.2 million bikes.
29 March 2025 International Economics-I Lecture Note Slide #18
 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰The net loss to consumers is the shaded area a + b
+ c + d because consumer surplus declines from
triangle FEC to triangle FGH.
⇰Area a + b + c is the loss of $30 per bike of
consumer surplus for those who continue to buy
bikes at the higher price.
⇰Area d is the loss of consumer surplus for those
who stop buying bikes.

29 March 2025 International Economics-I Lecture Note Slide #19

 3.2. Tariff and Non-Tariff Barriers…cont’d
THE TARIFF AS GOVERNMENT REVENUE
⇰As long as the tariff is not so high as to prohibit all
imports, it also brings revenue to the country’s
government.
⇰This revenue equals the unit amount of the tariff
times the volume of imports with the tariff.
⇰ On the graph in slide 16 the total government
revenue from collecting the tariff is area c.

29 March 2025 International Economics-I Lecture Note Slide #20

 3.2. Tariff and Non-Tariff Barriers…cont’d
THE NET NATIONAL LOSS FROM TARIFF
⇰By combining the effects of the tariff on
consumers, producers, and the government, we
can determine the net effect of the tariff on the
importing country as a whole.
⇰On the above graphical analyses we can see that
the dollar value of the consumer losses exceeds
the dollar value of the producer gains from the
tariff.
⇰We have also seen that the country’s government
gains some tariff revenue.
29 March 2025 International Economics-I Lecture Note Slide #21
 3.2. Tariff and Non-Tariff Barriers…cont’d

Consider
this graph

29 March 2025 International Economics-I Lecture Note Slide #22

 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰On the left panel of the above graph we can see
that the dollar value of what the consumers lose
(area a + b + c + d) exceeds even the sum of the
producer gains (area a) and the government tariff
revenues (area c).
⇰The net national loss from the tariff is area b plus
area d.
⇰Alternatively, the same net lose can be shown by
the right hand side figure.

29 March 2025 International Economics-I Lecture Note Slide #23

 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰The demand curve for import of the bicycles by
subtracting the domestic supply curve from the
domestic demand curve for bicycles at each price
(horizontally).
⇰That is, for each possible price, the quantity
demanded of imported bicycles equals the
domestic quantity demanded minus the domestic
quantity supplied at that price.
⇰With free trade, the price of imports is $300.
⇰The country imports M0 bikes.
29 March 2025 International Economics-I Lecture Note Slide #24
 3.2. Tariff and Non-Tariff Barriers…cont’d
⇰With the imposition of the tariff, the domestic
price of imported bikes rises to $330.
⇰The country then imports only M1 bikes.
⇰The government collects tariff revenue equal to
area c.
⇰The net national loss from the tariff is shown on
the right side as the area of triangle b + d. (the
same area to the sum of the areas b and d in the
left panel).
⇰Empirically, the net loss b + d equals $6 million.
29 March 2025 International Economics-I Lecture Note Slide #25
 3.2. Tariff and Non-Tariff Barriers…cont’d
3.1.2. NON-TARIFF BARRIERS (NTB)
⇰A nontariff barrier (NTB) to imports is any policy used
by the government to reduce imports, other than a
simple tariff on imports.
⇰Nontariff barriers can take many forms.
⇰NTB reduces imports through one or more of the
following direct effects:
– Limit the quantity of imports.
– Increase the cost of getting imports into the market.
– Create uncertainty about the conditions under which
imports will be permitted.

29 March 2025 International Economics-I Lecture Note Slide #26

 3.2. Tariff and Non-Tariff Barriers…cont’d
Types of NTB Description Direct effects on
Import Quota Quantitative limit on imports - Quantity
Voluntary Export Quantitative limit on foreign exports (based on threat of - Quantity
Restraint (VER) import restriction)
Tariff Quota Allows imports to enter the country at a low or zero tariff up - Quantity
to a specified quantity; imposes a higher tariff on imports
above this quantity.
Government Laws and government rules that favor local products when - Quantity
Procurement the government is the buyer - Cost of Import
Local Content & Mixing Require specified use of local labor, materials, or other - Quantity
Requirements products
Technical & Product Discriminate against imports by writing or enforcing - Cost
Standard standards in a way that adversely affects imports more than - Uncertainty
domestic products
Advance Deposit Requires some of the value of intended imports to be - Cost (forgone interest)
deposited with the government and allows the government
to pay low or zero interest on these deposits
Import Licensing Requires importers to apply for and receive approval for - Cost
intended imports - Uncertainty

29 March 2025 International Economics-I Lecture Note Slide #27

 3.3. The Infant - Industry Argument for Protection

⇰The infant-industry argument asserts that a

temporary tariff is justified because it cuts down
on imports while the infant domestic industry
learns how to produce at low enough costs.
⇰Eventually the domestic industry will be able to
compete without the help of a tariff.
⇰To understand how the infant-industry argument
works consider the analysis below with the aid of
the figure below which uses the example of small
farm tractors.
29 March 2025 International Economics-I Lecture Note Slide #28
 3.3. The Infant - Industry Argument…cont’d

29 March 2025 International Economics-I Lecture Note Slide #29

 3.3. The Infant - Industry Argument…cont’d

⇰As can be seen on the left panel of the above

graph, no amount of production in this country is
cost-competitive by world standards (i.e. the
current domestic supply curve Sdn is everywhere
above the world price of $3,000 per tractor).
⇰Apparently, no domestic production would occur
now with free trade. If the country’s government
imposes a tariff of 33.33 percent, the domestic
price rises to $4,000 per tractor and domestic
firms produce 20,000 tractors.
29 March 2025 International Economics-I Lecture Note Slide #30
 3.3. The Infant - Industry Argument…cont’d

⇰Now the country incurs inefficiencies of area b

and area d because of the tariff.
⇰The payoff to incurring these inefficiencies is that
the infant industry grows up.
⇰As firms produce tractors, they find ways to lower
their costs.
⇰Sometime in the future the domestic industry’s
supply curve will shift down to Sdf.
⇰The government can then remove the tariff.

29 March 2025 International Economics-I Lecture Note Slide #31

 3.4. Import Substitution and Export Promotion
Import Substitution
The industrialization strategy of import
substitution became popular in developing
nations such as Argentina, Brazil, and Mexico;
some countries still use it today.
Import substitution involves extensive use of
trade barriers to protect domestic industries from
import competition.
The strategy is inward-oriented in that trade and
industrial incentives favor production for the
domestic market over the export market.
29 March 2025 International Economics-I Lecture Note Slide #32
 3.4. Import Substitution and Export …cont’d
Import substitution calls for establishment of a
domestic industry to produce replacements for
imports.
In the extreme, import-substitution policies could
lead to complete self-sufficiency.
The rationale for import substitution arises from the
developing countries' perspective on trade.
Many developing countries feel that they cannot
export manufactured goods because they cannot
compete with established firms of the industrial
countries, especially in view of the high trade barriers
maintained by industrial countries.
29 March 2025 International Economics-I Lecture Note Slide #33
 3.4. Import Substitution and Export…cont’d
Export Promotion
The strategy is outward-oriented because it links
the domestic economy to the world economy.
By 1970s, many developing countries were
abandoning their import-substitution strategies
and shifting emphasis to export-led growth.
The economic performance of nations
implementing export-led growth policies has been
superior to that of nations using import-
substitution policies.
29 March 2025 International Economics-I Lecture Note Slide #34
 3.4. Import Substitution and Export…cont’d
Export-led growth policies introduce international
competition to domestic markets, which
encourages efficient firms and discourages
inefficient ones.
By creating a more competitive environment,
they also promote higher productivity and hence
faster economic growth.

29 March 2025 International Economics-I Lecture Note Slide #35

 3.4. Import Substitution and Export…cont’d
Advantages and disadvantages of these strategy
are discussed in the table below:
Strategy Advantages Disadvantages

Import Substitution  The risks of establishing  No incentive for domestic

a home industry to industries to increase their
replace imports are low efficiency.
 It is easier for a  Manufacturers cannot take
developing nation to advantage of economies of scale
protect its  Discriminates against all other
manufacturers against industries, including potential
foreign competitors exporting ones.
 Locate manufacturing  any attempt to remove those
plants in the country, restrictions is generally strongly
thus providing jobs for resisted.
local workers.  Import substitution also breeds
corruption.

29 March 2025 International Economics-I Lecture Note Slide #36

 3.4. Import Substitution and Export…cont’d
Strategy Advantages Disadvantages

Export promotion  Encourage industries to have a  Very difficult for developing

comparative advantage nations to set up export
 Allow domestic manufacturers industries
greater scope for exploiting  Developed nations often
economies of scale provide a high level of
 Impose a competitive discipline effective protection for their
on domestic firms that forces industries
them to increase efficiency.

29 March 2025 International Economics-I Lecture Note Slide #37

 Untouched Topics in the Chapter Left for
Reading Assignment
 Trade Policy and Economic Welfare
Int’l econ 10th ed pp 228, 237
 Optimal Trade Policy Intervention

 Trade Liberalization and Issues of Openness

Dominic 349

29 March 2025 International Economics-I Lecture Note Slide #38

 Trade Policies for Developing Nations
 Although international trade can provide benefits
to domestic producers and consumers, some
economists maintain that the current
international trading system hinders economic
development in the developing nations.
• They believe that conventional international trade
theory based on the principle of comparative
advantage is irrelevant for these nations.

29 March 2025 International Economics-I Lecture Note Slide #39

 Trade Policies for Developing Nations…cont’d
Developing-Nations’ Trade Characteristics
 While we examine the characteristics of
developing-nation trade, we find that developing
nations are highly dependent on the advanced
nations.
 A majority of developing-nation exports go to the
advanced nations, and most developing-nation
imports originate in the advanced nations.
 Trade among the developing nations is relatively
minor, although it has increased in recent years.
29 March 2025 International Economics-I Lecture Note Slide #40
 Trade Policies for Developing Nations…cont’d
 Another characteristic is the composition of
developing-nations' exports, with its emphasis on
primary products (agricultural goods, raw materials,
and fuels).
 Of the manufactured goods that are exported by
the developing nations, many (such as textiles)
are labor intensive and use modest technology in
their production.
 It is significant, however, that in the past three
decades the dominance of primary products in
developing-nation trade has greatly diminished
29 March 2025 International Economics-I Lecture Note Slide #41
 Trade Policies for Developing Nations…cont’d
 Many developing nations have been able to
increase their exports of manufactured goods and
services relative to primary products:
 China, India, Mexico, South Korea,
 Hong Kong, Bangladesh, Sri Lanka, Turkey,
 Morocco, Indonesia, Vietnam, and so on.
 These nations that have integrated into the
world's industrial economy have realized higher
significant poverty reduction.

29 March 2025 International Economics-I Lecture Note Slide #42

 Trade Policies for Developing Nations…cont’d
Trade Problems of Developing Nations
 On the basis of their trading experience with the
advanced nations, some developing nations have
become uncertain on the distribution of trade
benefits between them and the advanced
nations.
 They have argued that the protectionist trading
policies of advanced nations hinder the
industrialization of many developing nations.

29 March 2025 International Economics-I Lecture Note Slide #43

 Trade Policies for Developing Nations…cont’d
 Below are the problems of trade among
developing nations:
Unstable Export Markets
 One characteristic of many developing nations is
that their exports are concentrated in only one or
a few primary products.
 A decrease in market demand for that product
can significantly reduce export revenues and
seriously disrupt domestic income and
employment levels.
29 March 2025 International Economics-I Lecture Note Slide #44
 Trade Policies for Developing Nations…cont’d
Worsened Terms of Trade
 Developing nations generally maintain that the
benefits of international trade accrue
disproportionately to the industrial nations.
 Developing nations complain that their
commodity terms of trade has deteriorated in the
past century or so, suggesting that the prices of
their exports relative to their imports have fallen.

29 March 2025 International Economics-I Lecture Note Slide #45

 Trade Policies for Developing Nations…cont’d
 Worsening terms of trade has been used to justify
the refusal of many developing nations to
participate in trade-liberalization negotiations.
 It is difficult to conclude whether the developing
nations as a whole have experienced a
deterioration or an improvement in their terms of
trade.

29 March 2025 International Economics-I Lecture Note Slide #46

 Trade Policies for Developing Nations…cont’d
Limited Market Access
 In the past two decades, developing countries as a
whole have improved their penetration of world
markets.
 However, global protectionism has been a hindrance
to their market access.
 This is especially true for agriculture and labor-
intensive manufactured products such as clothing
and textiles.
 Tariffs imposed by the industrial countries on imports
from developing countries tend to be higher than
those they levy on other industrial countries.
29 March 2025 International Economics-I Lecture Note Slide #47
 The End

Questions are Warmly Welcomed!

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