Chapter 3

Tariff barriers in
International Trade
M.s. Ngo Quynh Trang
Tarrif and impacts
Supply,
Demand, and
Trade in a
Single Industry
Supply,
Demand, and
Trade in a
Single Industry
Supply,
Demand, and
Trade in a
Single Industry
 Consumer surplus measures the amount a consumer gains from a purchase
by computing the difference between the price he actually pays and the
price he would have been willing to pay.

Consumer
surplus
 Consumer surplus is equal to the area under the demand curve and above the price.

Consumer
surplus
Producer surplus
– Producer surplus is the difference between how much a
person would be willing to accept for a given quantity of a
good versus how much they can receive by selling the good
at the market price. The difference or surplus amount is the
benefit the producer receives for selling the good in the
market.

– Producer surplus is equal to the area above the supply

curve and below the price
 – Country 1 is relatively small in the global market.

– Country 1 imports product X.

Example – The domestic supply function for product X is S = 10P – 20.

– The domestic demand function for product X is D = -10P + 80.

– The world price for product X is Pw = 3 USD

 Without trade:
– Equilibrium state of domestic supply and demand (Sd = Dd)
Example
– Equilibrium price: Pe = 5 USD
– Equilibrium quantity: Qe = 30
 P Dd Sd
E Domestic equilibrium
5

Domestic price with import tax

4
a
Example b c d World price
3
a’

Q
0
10 20 30 40 50
 Without import tax
– Country 1 accepts the world price level P = Pw = 3 USD.
– Domestic demand: Qd = 50
– Domestic supply: Qs = 10
– Imports: 40
With import tax
Example – Import tax applied: T = 1 USD per unit of X
– World price remains unchanged: Pw = 3 USD
– Domestic price with import tax is: P = 4 USD
– Domestic demand: Qd = 40
– Domestic supply: Qs = 20
– Imports: 20
 Impacts
– Consumer surplus decreases (consumers lose due to price increase):
ΔCS = – (a+b+c+d)
– Producer surplus increases (producers benefit): ΔPS = + a
– Government revenue increases (tax revenue): + c
Example
– Country 1 incurs a net loss: – (b+d)
Part b: production effect, losses due to shifting domestic production
in a costlier direction.
Part d: consumption effect, losses from reduced consumption
capacity.
 A prohibitive tariff is one that is at such a high cost that it deters the item
from being imported. khiến cho lượng nhập khẩu = 0

Price
C Dd Sd
10000

Prohibitive
tariff 2500
B
2200 D
a
b c d A
2000 E World price
e

0 S0 S1 D1 D0 Quantity
Export tax
 – Increase government revenue
Purposes – Improve trade conditions
– Ensure food security and protect domestic resources...
đảm bảo người trong nước đủ dùng đã rồi mới xuất khẩu nước ngoài
 – Country 1 is small compared to the world market
– Country 1 exports product X
Example – Domestic supply function of product X: Sd = 20P - 20
– Domestic demand function of product X: Dd = -10P + 70
– World price of product X: Pw = 5 USD
 Without trade:
– Equilibrium state of domestic supply and demand (Sd =
Example Dd)
– Equilibrium price: Pe = 3 USD
– Equilibrium quantity: Qe = 40
 Impacts
P
Dd Sd

5 World price
b c d
a
Domestic price without export tax
Example 4

Domestic price without trading

3
E

Q
0 20 30 40 60 80
 Without export tax
– Country 1 accepts the world price level P = Pw = 5 USD
– Domestic demand quantity: Qd = 20
– Domestic supply quantity: Qs = 80
– Export quantity: 60
With export tax
Example – Export tax rate applied: T = 1 USD per unit of X
– World price remains unchanged: Pw = 5 USD
– Domestic price with export tax: P = 4 USD
– Domestic demand quantity: Qd = 30
– Domestic supply quantity: Qs = 60
– Export quantity: 30
 Impacts
– Increase in consumer surplus (consumers benefit from lower
prices): ΔCS = + a
– Decrease in producer surplus (producers are harmed) ΔPS = -(a + b
+ c + d)
Example
– Increase in government revenue (tax revenue): + c
– Net loss for country 1: -(b + d)
Part b: Loss due to overconsumption of rice
Part d: Loss due to production below capacity
The Effective Rate Of
Protection (ERP)
 The official rate of tariff was intended to discourage the import of final
product and to promote the domestic production in the protected
industry. The rate of tariff ad valorem on the import of final product
Nominal rate was called as the nominal rate of tariff. A ten percent tariff on a finished
imported good was supposed to have a ten percent protection to the
domestically produced import substitute.
 – The writers like B. Balassa, W. Corden and H.G. Johnson
suggest that the nominal rate of tariff was not the appropriate
measure of the degree of protection. According to them, the
concept of nominal rate of tariff had a serious flaw that it
considered only the effect of tariff on final imported product.

Nominal rate – It did not recognise the structure of duties applied to the
imported raw materials and intermediate goods required in
the processing of the import substitutes. A country, many
often, imports a raw material either duty-free or imposes a
very low tariff rate on the imports of inputs than on the
import of final commodity.
 – The writers like B. Balassa, W. Corden and H.G. Johnson
suggest that the nominal rate of tariff was not the appropriate
measure of the degree of protection. According to them, the
concept of nominal rate of tariff had a serious flaw that it
considered only the effect of tariff on final imported product.
– It did not recognise the structure of duties applied to the
Nominal rate imported raw materials and intermediate goods required in
the processing of the import substitutes. A country, many
often, imports a raw material either duty-free or imposes a
very low tariff rate on the imports of inputs than on the
import of final commodity.
 The domestic value added equals the price of
the final commodity minus the cost of the
Value Added
imported inputs going into the production of
the commodity.
 – Balassa :

“Under the usual assumptions of international -immobility of

labour and capital, the effective rate of duty will indicate the
degree of protection of the value added in the manufacturing
ERP process.” In other words, the effective rate of tariff
establishes a relationship between the tariff and the domestic
value added. Such a tariff rate can be a true measure of the
actual rate of protection that the nominal tariff affords to the
domestic import-competing industries.
 V’ – V
ERP = Te = V (1)

ERP = Te = t – aiti (2)

ERP 1 – ai

– V - value added when free trade

– V' - value added after applying customs duties (t and ti)
– t - nominal customs duty.
– ti - customs duty imposed on imported input products
– ai - the proportion of imported input in the cost of the product
 Vietnam produces TV.

Free trade:

– The price of the TV in Vietnam is the same as in the world: P=Pw=500

USD

– The price of imported components for production: 400 USD

– Value-added in the country: V = 100 USD

Example When subject to import tariffs on TVs and imported components:

– Tariff imposed on imported TVs: 20%

– Tariff imposed on imported components: 15%

– The price of TVs in Vietnam: P = 600 USD 500x 1,2

– The price of imported components: 460 USD 400 x 1,15

– Value added after the tariff: V’ = 140 USD

è ERP = (140 - 100) / 100 = 40%

 ERP = Te = t – a it i (2) = t + a i(t – ti)
1 – ai 1 – ai
● ai = 0 ● → Te = t
● t = ti ● → Te = t Tariff escalation refers to the situation where tariffs are zero or low on
primary products and then increase, or escalate, as the product undergoes
● t > ti ● → Te > t
additional processing. Further, when tariffs on products escalate with the
● t < ti ● → Te < t
stage of processing, the effective rate of protection, or the tariff expressed as
●t↑ ● → Te ↑ fractions of value-added after deducting intermediate inputs from product

●t↓ ● → Te ↓ value, also increases. Thus, tariff escalation potentially signals high rates of
protection for value-added or processed products, and can inhibit
● ti ↑ ● → Te ↓
international trade in these goods
● ti ↓ ● → Te ↑