Question 1: Define the import tariff imposed and applied to imports of good by the United States and the Europe or China.
The widespread of international fabrication of networks and the raised geographical disintegration of supply chains intensely altered the landscape of world trade. Currently, intermediate goods and services dominate trade movements and quick industrialization of unindustrialized countries usually results from the prosperity insertion of the developing nations in these universe value chains. Among these, the most remarkable cases is the appearance of "the factory Asia", where industrialized and unindustrialized countries at varying stages of the development and with dissimilar resource endowments have fashioned complementary industrial linkages to emerge as the universe development powerhouse.
According to Dietzenbacher, D. and Romero, U., (2007), goods generated within such supply chains are trafficked across the majority of the countries, joining at each level and introducing an additional level of the value added. The consignments of the intermediate goods amongst the industries and participating counties offer the material support for the trade in tasks. This elucidates why the trade in tasks is more practical to the tariff duties executed on the international transactions and due to the tariff increase and the duties imposed on relatively elaborated components and parts are high. At the alteration of the import replacement industrial policies, which drove vertical tariff increase, in a universe dominated by the universe value chains, businesses that produce ultimate goods often manufacture intermediate components. Firms promoting for protection in ultimate goods might have an inducement to protect upstream fabrication, leading to compliment nominal tariff schemes (Dietzenbacher and Romero 2007).
Question two: with reference to WTO tariff profiles, compare and contrast the tariff structure across the range of groups shown in the table (A2) for the United States and one developing country of your choice. Define the developing country as any country that is not a member of the organization of economic corporation and development.
The International Input-Output matrices (I-O) provide a certain interesting tool for analyzing the effects of trade strategies on the supply chains. One of the major challenges the statisticians face is manufacturing inter-linked table to approximate the flows of intermediate services and goods between the nations and their individual industrial sectors. The raising attainability of the international input-output matrices provides a current perspective for re-entering one of the greatest vibrant matters of international economics in the 1960s and 1970s. The responsibility of effective fortification rates in industrial policies and trade. This paper also argues that the notion of EPR is certainly adapted to analyze protection in the current international economics. That is where the countries transact trade final goods, but trade in tasks. As an issue of fact, it is proved that EPRs do not measure defense on goods. However, it offers protection on the value-added, similarly to the way input-output matrices evaluate the domestic contents of trade services and goods. It can be proved that EPR forms the percentage rise in sectorial value increased per one unit of output that is made possible by nominal tariffs schedule comparative to the situation of the free trade (Escaith, and Gonguet 2011).
After briefly re-reading the tariff tables and the main censures that are contrasting by economists to the efficiency of EPRs in forecasting ex-ante the alterations in industrial structures, the paper will converse the order of the influences and propose a series of putrefaction techniques to examine, from an ex-post viewpoint. That means that, once all replacements induced by alterations in prices have occurred, what were the corresponding contributions of alterations in the trade policy? On one hand, the production structure on the next one, in discussing the observed alterations in EPRs. The paper syndicates both the market admittance statistics with the input-output matrices to indicate the increasing relationship of the Asian markets in a regional manufacturing network, and pronounces the major changes in the trade policy that conveyed this closer regional incorporation. The methodology originates from the comparative static analysis amidst 1995 (termination of the Uruguay Round), 2001 (before China joined the WTO) and 2005 (latest benchmark year for I-O matrices). To analyze the source of variations in effective protection, a sequence of counterfactual reproductions that will separate the respective charities of nominal defense (alterations in tariff schemes), productive arrangements (changes in productive linkages and technology) and the exchange rates (Greenaway 2003) are chosen.
Question 3: discuss what factors, in general, might explain any observed variation in the tariff structure between the two countries including what effect you think a tariff has on the price of the goods being imported when it is sold in the import market.
Trade Policy and Tariff Escalation
Initially, EPRs were utilized as an investigative indicator of tariff increase (the difference between high and low duties). Discerning between the low and high taxed imports was utilized for two different aims. The initial one was meticulously related to industrial strategy, specifically the import replacement strategy shadowed by a majority of developing nations in the post-World War II era. Protecting new industries was attained by raising huge tariff fences for their goods while maintaining their supply prices competitive through the reduced tariff on their smuggled inputs. In this hypothetical framework, tariff increase would be characteristically biased in favor of manufactured final products, whilst semi-processed inputs and raw material would have reduced duty rates.
The second cause was linked to the trade theory as a nation was supposedly capable to upgrade its terms and conditions of trade and welfare via the establishment of huge tariffs on products with reduced export bounciness or where it could importantly market power as the distributor. In this juncture, tariff summits were not associated to the level of processing. However, only to market powers the huge tariff nation liked for this good, either as a trader or the exporter. Nonetheless, even in terms and conditions of trade perspective, we must also expect a huge propensity of tariff peak for the processed goods due to the effect of goods differentiation. Individual states have lower market powers in products with the huge elasticity of replacement in relation to price for commodities. At the divergent, the likelihood of replacement is reduced for differentiated or specialized goods. The Building on Rauch classification (1998), divides products into three classes (commodities, differentiated goods and reference priced goods).
Theoretical Challenges in an Equilibrium Context
A chief supposition of EPRs when utilized as a predictor and not as the descriptor is the suggestion of fixed quantities in the manufacturing functions and indirectly causes the situation referred to as the Leontief prototype, which undertakes perfect complementarity among production factors. Whilst this supposition has some cogency in short-terms economics, it is no majority of the situation when long-term impacts have to be modeled. When the long-run impacts are reflected in an equilibrium context, dual forces contrast to lower the EPR effectiveness as the predictor; scale and substitution effects. The probability of substitution increases the choices open to all industries. When the national price of domestic goods rises, the demand will be reduced; the greater the exchange effects, the rapid demand swing to lower-priced goods. The case becomes even complex when non-traded and traded services are exchanged.
Therefore, the effective optimistic protection offered to the priority subdivisions will be favored by EPRs formula, whilst it has to be opposite for the undesired EPRs. Moreover, when intermediate and primary inputs are alternates, in specific when the effective protection alters the demand for labor in various sectors, it might lead to alterations in the comparative costs of labor and capital crossways the board, persuading further exchange impacts. Finally, in attendance of important scale impacts, the reduced demand resulting from huge nominal protection might reduce manufacturing volumes and upsurge the production price per unit. For instance, considerably alleviate or even converse the intended subvention on the subdivision value added.
Devoted Measure of Theory
The probability of substitutability clearly suppresses the analytical abilities of the EPR theory. Despite these challenges, the effective rate of defense remains widely utilized by the policy analysts and practitioners. There are many reasons behind the EPR resilience. Firstly, EPRs remain artificial descriptors of the present or past arbitrages produced by the practical tariff scheme on each section of the economy. The input-output matrix maintained in a specific point of the period is the result of the technology and resources available at that given period; the ultimate result evolves additionally from all the exchange impacts that took place due to the changes in comparative prices and the insignificant tariff structure. Stipulated that the sordid year selected for founding the national accounts is near to the normal state, free to new nominal or real shocks like natural disasters, alters in nominal exchange rate or tariff duties, the EPRs intended with the maintained input-output coefficients offer an unbiased and synthetic picture of the disposable economic effects of insignificant tariffs in the productive sectors.
In specific, it offers a good approximation of revenue transfer across the segments and the resulting anti-export prejudice resulting from the insignificant tariff scheme. It is a relatively modest measure to comprehend, compared to the other simulated approximations of the market distortions. Therefore, it is the form of a purely evocative perspective and an excellent amassed tariff indicator.
Secondly, the standard description can still smear to partial balanced economic strategy, applied by the economists. Moreover, the rising availability of quantifiable general equilibrium models in 1980s reinserted the EPR as a bonafide indicator. CGE models simulate the exchange effects that alter in nominal defense and will control the economy, re-operationalizing the usage of EPRs in the comparative static. In specific, CGEs make probable the behavior of sensibility analyses for measuring the effects of exchange impact on the prognostic power of EPR.
Trade in Value Added and Vertical Specializations
According to Krugman, H. (1979), recent growths in the nature of international trades are offering an additional appeal for these indicators. It has altered business models and manufacturing; today an escalating share of manufacturing goods is internationally disintegrated. Before attaining their final period, production in process transits through the international supply chain in the means of intermediate products; at each level, value added is embodied in the goods then shipped to the subsequent step, usually in another country. Therefore, we are in a condition where nations do not trade ultimate goods, but trade businesses or manufacturing services; the motive was authorized by Rossi and Grossman (2006), the phenomenon of trade in task. From a state account approach, what is globally dealt is value added the primary inputs and the enough measure of operations distortions are no more the insignificant tariff scheme on the outputs, but the real rate of protections on the value added. In this situation, huge positive EPR is a bad sign for the beneficiary sector as it designates a strong anti-export prejudice in trades in task approach as the domestic price of the subdivision value added is higher than international costs. Trade in the intermediate is the blood stream of universal value chains as well as the glue that ties the individual input-output matrices in the international input-output table. Thus, for any offered export by the industry "j" in a specific country "c", then, it is probable to decompose the total exported values into (i) the local value-added produced in its manufacture, both straight from the major producing company, and indirectly through the transactions among domestic companies; and (ii) imported value-added generated in producing imports utilized in production. Therefore, utilizing international input-output matrices offers additional modification in the calculation of the traditional EPRs indicator, as the source of imported products is identified. Therefore, MFN tariffs might be adjusted for special treatments, when important. Whilst the proper quota of the domestic influence content of trades is still a subject of the argument, in the first perspective it could be to complement the indirect usage of products in the original description of the EPR. Using Leontief in its place of the technical constants would seizure this indirect fastening of intermediate products (Krugman, H. 1979).
A good example of a tariff that is put on goods from outside the country is well explained in one of my articles (The Softwood Lumber Dispute). A tariff, as explained in the article, is in a simple form, a tax levied on goods that get into a country by the government of which the goods have been imported. A tariff is charged on the basis of the total percentage of the good's value that is declared; it can otherwise be stated as the total sales tax. Tariff rates are, however, rated differently on different goods and they are not applicable to goods that are produced domestically. A book that has been written recently and that is getting in the market in a big way, by Robert Feenstra- (Advanced International Trade: Theory and Evidence), gives three situations from which the governments impose tariffs:
- to protect domestic industries from weakening as a result of undue competition from foreign industries.
- to protect domestic industries that have been there for a long time from foreign competition.
- to avoid dumping of the domestic producers by foreign governments or companies.
Dumping takes place when foreign companies charge a price in the domestic market that is too low. In this case too low is a price that is lower in the foreign market than the price in the domestic market. In other instances, it may mean a price that is below the production cost; hence the producers experience a loss. It may mean a price that is below the production cost; hence the producers experience a loss.
The cost of tariffs is not the solution to the economic problems. The World Bank estimates an expansion in the global economy by 830 billion dollars by 2015, though this can only be achieved when all barriers to the economy are eliminated. An example of these barriers is the tariff. The effects of the economy by the tariff can be zoomed down into two constitutes.
- the effect to the country to which a tariff has been imposed
- the effects to the country that is imposing the tariff.
In all of the two instances, there is a net loss to the economies of both countries; the country imposing and the one that the tariff has been imposed.
Impact to the Economy of a Country with the Tariff Imposed on it
Greenaway (2003), highlights that foreign tariff hurt the economy of a country in such a significant way that the effects can easily be noticed. Foreign tariffs are the main course of the increase of the cost of domestic producers leading to them selling less of their goods to the foreign market. An example of such an effect is in the case of the softwood lumber dispute; it is estimated that Canadian lumber producers have incurred a cost of about 1.5 Canadian dollars from the American tariffs. This reduction in demand led the producers to tone down their production leading to loss of jobs. Reduction of working places impacted to other industries as the demand for consumer products reduced as a result of reduced employment levels. From this, we can make a conclusion that foreign tariffs in conjunction with other market barriers are the cause of the economic health decline of nations (Greenaway 2003).
The next section gives an explanation of why the economy of the countries imposing these tariffs is also hurt. With an exception of very rare instances, tariffs hurt the economy of countries which impose them as these countries end up spending more than what they gain. However, tariffs are beneficial to domestic producers in a country. These producers are immune to external competition in their local markets. The reduced competition has a negative impact on consumers as the prices of the products will rise. The total sales of domestic producers will also rise leading to great profits. The increase in profits from the sale of the produce causes domestic producers to hire more people thus creating employment opportunities. The tariffs are the main cause of the increase in the government revenues that can be utilized to the benefit of the economy (Koopman, Wang and Wei 2011).
There is, however, another negative effect of a tariff. When prices of goods with tariffs increase the consumers are made to either buy less of these goods or less of other goods depending on their wants. The increase in price can be looked at as reducing the income of the consumer since they use more money to purchase fewer goods. On the other hand, domestic producers of other industries sale less of their goods and this cause a decline in the economy (Greenaway 2003).
In general, the gains that come with increasing domestic production in countries where industries are protected by tariffs with the inclusion of the government revenues does not do away with the losses, increased prices burdened on consumers and the cost putting in place the tariff. So far we have not put in consideration the probability that other countries can put tariffs on goods in retaliation, this would be even more costly to us. Even if these countries fail to retaliate, the cost would be still high to the economy. From the article, "The Effects of Taxes on Economic Growth", we get to understand that if taxes are increased consumers' behavior is altered which brings about the inefficiency of the economy. From the book, The Wealth of Nations written by Adam Smith we get the picture of how the wealth of an economy is increased by the international trade. If the international trade is slowed down it will automatically reduce the growth of the economy. With this knowledge, we can easily tell that tariffs are harmful to the economy of countries imposing them. We, however, need to face this in two different dimensions: theoretically and practically. Whatever we have discussed is theoretical, how does it work in practice? (Lamy 2010).
Empirical Evidence on the Effect of Tariffs on the Country Imposing Them
Several studies have shown that tariffs greatly reduced economic growth to the countries putting them in practice. Below are the examples of these studies:
- The essay on Free trade which can be found at the concise encyclopedia of economics, discusses the international trade policy. Alan Blinder, in the assay, states that a study conducted in 1994, the US consumers incurred $42000 yearly for the textile jobs that were preserved by import quotas. This total was more than what a textile worker was earning. The same study reviled that baring imports from other countries averagely costs $105000 in a year for the automobile jobs that were saved, $42000 for TV manufacturing jobs and $750000 for the steel industry jobs. In 2000, the tariffs of imported steel goods were raised by the then president George Bush between 8 and 30 percent.
- The Mackinac center for public cities indicates that the tariff will reduce the income of US nations between 0.5 - 1.4 billion dollars as estimated from the study revealing that less than 10000 steel industry jobs will be saved by the cost of more than $400000 per saved job. The study also stated that for every job saved by this measure, 8 will be lost.
- Protecting these jobs has a cost that is not new to both the steel industries and the United States. The national center for policy analysis gave an estimate that in 1994 tariffs coasted the US economy 3203 billion dollars for all the jobs saved. Consumers incurred a cost of $70000 per job saved in Europe while Japanese consumers lost $ 600000 per job saved to Japanese tariffs.
The above studies, along with many others, give an indication that tariffs bear more harm than positive effects. In the next section, we will discuss the reason behind the governments keep enacting tariffs, yet they have more losses than benefits.
Consecutive studies show that tariffs, no matter the number they are, has negative impacts to the economy. Why would politicians insist on enacting tariffs, yet they are not beneficial to the economy? After a reelection of politicians when the economy is doing well one would think that it would be on their own self-interest to prevent tariffs. It can be remembered that not all people are affected by the tariff. When the tariff is enacted there are those people and industries that lose while others gain. An individual needs to understand why tariffs and policies are enacted so as to comprehend on how the benefits and loses are distributed. In his book, Mancur Olson gives an explanation why economic policies in most cases are beneficial to only a small group of people at the expense of the larger group. An excellent example for this is the tariffs placed on the imported softwood lumber from Canada. For instance, 5000 jobs at the cost of $200000 per job, or a cost of 1 billion dollars to the economy. If this is distributed to individual levels of people in America, it will only represent a few dollars in the pockets of American citizens. It is, obviously, notable that no American will waste time and funds to educate him on this issue. However, the American softwood lumber benefits greatly from the tariff imposed on Canada. Due to these measures, the workers of the company and the company itself will be enacted, as they benefit from them. This company has the money to lobby the measure, as opposed to those, who lose and have no money to lobby against the issue. At the end of the day, the tariff will be passed even though it has a negative impact to the economy.
However, in this case, the benefits from the tariffs are greater than the loses. One can easily feel the impact of a closure of a company if it is not protected by the tariffs. Although 8 workers will be rendered jobless by the softwood lumber tariff, this cannot be compared to the number of people who will lose their jobs when the softwood lumber industry closes down.