Tariffs Describe a Specific Tariff, an Ad

Tariffs

Describe a specific tariff, an ad valorem tariff, and a compound tariff. What are the advantages and disadvantages of each?

A specific tariff is a fixed amount of taxation, placed by a government, per physical unit of an imported product. (Carbaugh, 2004). This enables the government of the importing nation to target certain goods from other countries that might be competitive with the nation's major, domestically produced goods. However it also reduces price competition internally within the nation for those goods and services for its citizens and makes its citizens pay more for those goods. An ad valorem tariff is a tax on imports that is specified as a percentage of the value of the good or service being taxed. (AmosWEB, 2004). This tends to penalize luxury or more expensive imported goods, making them even more prohibitive in terms of cost. A compound tariff is a combination of an ad valorem tariff plus a specific tariff. It places a tariff upon a specific good, but at a rate that is not fixed, but is a percentage of the value of the good or service being taxed. (ASYCUDA, 2003)

Under what conditions does a nominal tariff applied to an import product overstate or understate the actual, or effective, protection afforded by the nominal tariff?

A nominal tariff, or the rate of duty charged on the gross value of a given product may overstate the actual protection given to that product if it seems prohibitively high in relation to its cost to manufacture in the home nation. But may not be so in economic reality, if, in competition with the other substitute goods of the nation it is being imported to, the product priced relatively low or attractively. Conversely, even a low nominal tariff may be protective if the imported product is easily substituted by cheaper, comparable goods produced or not subject to a tariff in the foreign nation.

Less-developed nations sometimes argue that the industrialized nations' tariff structures discourage the less-developed nations from undergoing industrialization.

Explain.

Nations that are industrialized export cheaper goods and services at a rate that less developed nations cannot compete with, so the less developed nations purchase these goods, thus subsidizing the further growth of developed nations, rather than the developing nation's own internal growth. However, when the less-developed national governments attempt to tax the goods of the more developed nations, the more developed nations cry foul and call the less-developed nations protectionist, in a negative fashion, and use their national economic leverage to start trade wars.

Distinguish between consumer surplus and producer surplus. How do these concepts relate to a country's economic welfare?

Producer surplus refers to the surplus of manufactured goods produced relative to the rate of consumer demand, while consumer surplus refers to a demand that exceeds supply for a good or service. A country's economic welfare is stable when these are at an equilibrium, and an imbalance in trade can result in a disturbance of equilibrium, if imported goods are much cheaper than domestic goods, resulting in increased consumer demand for foreign goods that does not result in an increase in domestic wages and infrastructure growth.

When a nation imposes a tariff on the importation of a commodity, economic inefficiencies develop that detract from the national welfare. Explain.

When other nations are discouraged from exporting commodities to a particular nation, a trade war with that nation can result, thus increasing the price of imported commodities overall, as the other nation reacts to the tariff as a hostile threat. Furthermore, if the commodity is a raw good that is integral to the creation of other goods, or to the generation of a vital service aspect of the economy, the price of these other goods and services will rise and make life more expensive and difficult for the nation's citizens, of the nation imposing the tariff.

A nation that imposes tariffs on imported goods may find its welfare improving should the tariff result in a favorable shift in the terms of trade. Explain.

However, an import tariff can also encourage a nation's citizens to purchase home-manufactured goods, thus stimulating industry growth within a nation's borders, and generating jobs and fostering industry growth within the nation.