Tariffs
• Tariff – a tax on on imports that is not subject to the same goods
produced domestically
• Quota – a restriction on quantity of imports of a good
Rationale
• Dumping by large producers
• Variant: Import competition unfair (subsidized by their governments)
• Variant: Infant industries in home (need protected markets)
• Variant: Economies of Scale in Production
• Politically powerful industry (lots of employment)
• Other country imposes tariffs (tit for tat)
• Punishment for other political disputes
• Backdoor pollution
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Dumping
[Link]
ping-explained-definition-and-effects
Dumping is when foreign firms dump products at artificially low prices in
the European market. This could be because countries unfairly subsidise
products or companies have overproduced and are now selling the
products at reduced prices in other markets.
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But what about other industries?
EU plans simpler rules for billions worth of
farm subsidies, draft shows
The EU's Common Agricultural Policy (CAP)
of farming subsidies is worth around a
third of its 2021-27 budget, or around 387
billion euros ($399 billion) in payments to
farmers and rural development.
Source: Straits Times
3
Global data on subsidies
Source: Trade Spillovers of Domestic Subsidies, Working Paper, IMF
by Lorenzo Rotunno and Michele Ruta
4
Politically powerful industry: steel
Trump Tariffs 2018: Source: [Link]
25% on all countries except Canada and
Mexico (initially)
But
Steel using industry jobs outnumber
steel jobs by 80 to 1
[Link]
Steel industry shed jobs due to new technology but in
fact was the second largest growth after software.
Source: Reallocation and Technology: Evidence from the
US Steel Industry, American Economic Review, by Allan
Collard-Wexler, Jan De Loecker
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Analysis of tariffs - preliminaries
• Consumer Surplus
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Analysis of tariffs - preliminaries
• Consumer Surplus
7
Analysis of tariffs - preliminaries
• Producer Surplus
8
Tariffs for a small country
• Small = its demand does not affect world price
c
gut
consumer
a c
b d loss all
9
Welfare for a small country
• Net Welfare effects = Producer Gain + Government Revenue Gain
- Consumer Loss
= a + c – (a+b+c+d)
= -b-d
A small country cannot gain in net basis by imposing a tariff.
-b = Production distortion loss = Domestic Producers Producing too much
-d = Consumption distortion loss = Domestic Consumers consuming too less
Government Revenue = c = t * (D2 – S2)
10
Tariffs for a large country
• Large = its demand does affect world price
Assume home is a large country.
Assume Foreign is the rest of the world (therefore, large) or another large
country.
Concepts:
Home’s Import Demand Curve: Demand (in excess of domestic
production) that home consumers demand at a given price
Foreign Excess Supply Curve: Supply (in excess of domestic demand)
that foreign produces supply at given price
Analyse no tariff case first
11
Home Import Demand Curve
At P1, Import Demand = D1-S1, at A, import demand = 0.
12
Foreign Export Supply Curve
At P1, Export Supply = S*1-D*1, at P*A, export supply= 0.
13
Equilibrium for a large country
Home Import Demand = Foreign Export Supply
Home Demand – Home Supply = Foreign Supply – Foreign Demand
Home Demand + Foreign Demand = Foreign Supply + Home Supply
World Demand = World Supply
14
Tariff imposed by a large country
A tariff imposed by a large
country changes the world
price.
World price reduces from Pw to
P*T
Thus, home consumers don’t
pay Pw+t, they pay P*T+t .
World quantity produced also
reduces to QT.
15
Welfare due to tariff by large country
Net Welfare Gain
= producer gain (a) – Consumer
Loss (b+c+d) + Government Gain
(c+e).
= -(b+d) + e
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Welfare due to tariff by large country
Net Welfare Gain
e = terms of trade gain
(price reduces in world market due
to tariff)
-b = Production distortion loss
= excess production by
domestic producers
-d = Consumption distortion loss
= too little consumption by
domestic consumers
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Trump Trade War – 2018
18
Trump Trade War – 2018
Estimates
Producer gain = $31.8 billion per year = a
Consumer Loss = $114.1 billion per year = a + b + c + d
Government Revenue gain = $65.9 billion = c+e
Net gain = Producer Gain + Government Revenue Gain
– Consumer Loss
= 31.8 + 65.9 – 114.1 = - 16.4 billion
Source: Pablo D. Fajgelbaum, Pinelopi K. Goldberg, Patrick J. Kennedy, and Amit K. Khandelwal, “The
Return to Protectionism,” The Quarterly Journal of Economics 135, no. 1 (February 1, 2020), pp. 1–55
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Trump Trade War – Retaliation
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Trump Trade War – 2018
Farm product tariffs by China required annual subsidies of $10 billion to
US Farms
Farm bankruptcies in the US increase by 24%
retaliatory tariff
Trump Trade War – v2.0 2025 Ricardo model
in progress..
25% on steel, aluminium
[Link]
impose-25-per-cent-tariffs-on-steel-aluminum-imports/
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