Page 110 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance Dilfraz Singh, Lovely Professional University

Notes Unit 9: Economic Effects of Tariff and Quotas on National
Income, Output and Employment

CONTENTS
Objectives
Introduction
9.1 Impact to the Economy of a Country with the Tariff imposed on it
9.2 Empirical Evidence on the Effect of Tariffs
9.3 Summary
9.4 Key-Words
9.5 Review Questions
9.6 Further Readings

Objectives

After reading this Unit students will be able to:
• Analyse the Economic Effects of Tariff and Quotas
• Discuss Impact to the Economy of A country with the Tariff Imposed on It.
Introduction

A tariff is simply a tax or duty placed on an imported good by a domestic government. Tariffs are
usually levied as a percentage of the declared value of the good, similar to a sales tax. Unlike a sales
tax, tariff rates are often different for every good and tariffs do not apply to domestically produced
goods.
The upcoming book Advanced International Trade: Theory and Evidence by Robert Feenstra gives
three situations in which governments often impose tariffs:
• To protect fledgling domestic industries from foreign competition.
• To protect aging and inefficient domestic industries from foreign competition.
• To protect domestic producers from dumping by foreign companies or governments. Dumping
occurs when a foreign company charges a price in the domestic market which is "too low". In
most instances "too low" is generally understood to be a price which is lower in a foreign market
than the price in the domestic market. In other instances "too low" means a price which is below
cost, so the producer is losing money.
The cost of tariffs to the economy is not trivial. The World Bank estimates that if all barriers to trade
such as tariffs were eliminated, the global economy would expand by 830 billion dollars by 2015. The
economic effect of tariffs can be broken down into two components:
• The impact to the country which has a tariff imposed on it.
• The impact to the country imposing the tariff.
In almost all instances the tariff causes a net loss to the economies of both the country imposing the
tariff and the country the tariff is imposed on.
9.1 Impact to the Economy of a Country with the Tariff Imposed on It

It is easy to see why a foreign tariff hurts the economy of a country. A foreign tariff raises the costs of
domestic producers which causes them to sell less in those foreign markets. In the case of the softwood

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