CHAPTER 5 IMPORT PROTECTION POLICY:

TARIFFS

 Types of import tariffs

 Effects of import tariffs
 Measurement of import tariffs
§1 Types of Import Tariffs

1. In terms of the means of collection

(1) Specific duty: A tariff levied as a fixed charge for each
unit of imported goods.
 Advantage: Can be easily collected.
 Disadvantage: It does not vary with the price of the good.
Protective value varies inversely with the
price of the import.
Example:
Import price: $5. Tariff: $1/unit (= 20% value of import )
Now price rises to $10, tariff: $1/unit (= 10% value of import)
(2) Ad valorem duty
 A duty levied as a constant percentage of the value of

imported goods. (25% tariff on the imported cars).

 Advantage: preserves the protective value of the trade
interference.
 Disadvantages (difficulties):
 When the price falls, so does the tariff, and domestic industries
become more vulnerable to competition.
 When the price rises ， so does the tariff, but a country is often
less interested in protection when the price is higher.
 Inappropriate transfer pricing.
(3) Mixed or compound duty

 A combination of specific duty and ad valorem duty.
Example:
A compound duty on imports of car batteries consists of 10% of the
value plus $1.00 per battery.
A shipment of 100 batteries valued at $2,000 would be assessed at a
$300 compound duty (10% of $2,000 + $1.00×100 = $300). 

(4) Alternative duty

When both the rate of a specific duty and an ad valorem
duty are stipulated for a particular item, the customs
would impose duties by adopting either of these two duties.
2. In terms of the different tariff rates applied

(1) Preferential duty

A tariff levied against imports from a country that is being
given favored treatment, as in a preferential trading arrangement.
An historical example:
Commonwealth or imperial preference, whereby Great Britain
levied a lower rate if the goods was coming into Britain from a
country that was a member of the British Commonwealth, such as
Australia, Canada, or India.
The EU negotiated a series of preferential trade agreements
with certain developing nations in Africa, the Caribbean and the
Pacific (ACP).
(2) Generalized preferential duty

 A duty extended under the General System of Preferences (GSP).

GSP is established in the early 1970s.

 Under the system, developed countries (donor countries) allow duty

free or low-duty entry to imports from selected developing countries
(receiving countries) up to a certain limit or quota.

 The tariff is a unilateral grant of tariff concessions, i.e. developing

countries are not required to extend reciprocal tariff reductions. (They
must, however, meet certain conditions.)

 GSP is implemented through GSP schemes of the donor countries.

GSP Schemes:

① Country eligibility criteria (a selected list of countries)

The countries must be a designated beneficiary country.
For example, in the first GSP scheme of the USA, members of
OPEC and countries dominated by international communism
were excluded.

② Product eligibility criteria (a selected list of products)

For example, under the first GSP scheme of the USA, there are
some 3,000 articles that have been designated as eligible. “Import
sensitive” items such as textile and apparel articles; watches;
certain electronic articles; certain steel articles; certain footwear
articles; and certain glass products are excluded.
③ Competitive need criterion

 Competitive need decision focuses on individual countries.

 For example, if a product that is imported from any one country
exceeds 50% of the total quantity of U.S. imports from all countries,
it will be removed just for the following year, and it will be removed
just for that country.
 Similarly, products may also be removed from any one country if
total imports from that country exceed a certain value.
 The EU, Japan and Australia take other similar measures like prior
limitation to protect their domestic production and market.
④ Graduation policy

 A product or all products could be removed from the GSP for one
particular country if it was found that this country is sufficiently
competitive in a product or all products in the world market.

 In 1988, President Reagan “graduated” Hong Kong, Korea, Taiwan

and Singapore entirely from the GSP program. Previously, goods
from these countries had amounted to about 60% of all duty free GSP
imports.
In 1994, Mexico was “graduated”. In 1997, Malaysia was
“graduated”.
 On Jan. 1, 1995, the EU also adopted the policy.
⑤ Rules of origin
 Criteria needed to determine the national source of a product.
 To ensure that only the goods from the beneficiary countries
receive the preference.

(i) Rule of direct consignment ：

 Be shipped directly from the beneficiary country to the importing
country.
 If, however, due to geographic or shipment reasons, shipment via
the third country or territory has to be made, the article must be
under the custody of customs, and relevant certifications of
transit must be provided. 
(ii) Substantial transformation

 It’s difficult to determine the origin of a product when a

product is manufactured, assembled, or made from
materials originating in other countries.

 The standard of substantial transformation varies from

country to country. In the United States, 35% value added
is required.

 In the EU and Japan, however, a specified change in tariff

heading is required. 
(iii) GSP origin certificate

GSP-covered imports must be

accompanied by a Certificate
of Origin issued by one of the
following certifying bodies:
the exporting country's customs
agency; another authoritative
government agency;
or the Chamber of Commerce
or other similar bodies.
(3) MFN duty

 A duty for nations entitled to most-favored-nation treatment

or trading status.

 When one country grants “most-favored-nation” treatment,

it is agreeing to accord products imported from that
country the most favorable treatment or the lowest tariff
rates that is to similar products imported from its other
MFN trading partners.

 The term of most-favored-nation treatment represents an

element of nondiscrimination in tariff policy, not special,
favored treatment over all other countries.
(4) General duty
A non-MFN tariff, applied to countries without MFNT
agreement.

A country's tariff schedule (or customs tariff) is a list of all

its import and export duties.
 Single column schedule: the tariff is the same for a specific
product regardless of the country of origin.
(only a few countries: Uganda, Panama, Venezeula)
 Multicolumn schedule: discriminates among export
countries, with lower rates applying to countries with which
tariff treaties have been negotiated.
http://www.china-customs.com/customs-tax/
3. In terms of special purposes for collection

(1) Countervailing duty

 A tariff designed to "counter" the effects of the foreign export

subsidy.

 They are imposed when a foreign country subsidizes its

exports, hurting domestic producers in the importing country.

 GATT 1994 Article VI and the GATT "Agreement on Subsidies

and Countervailing Duties"
(2) Anti-dumping duty

 A duty to imports to offset the effects of dumping.

 Dumping is a situation of international price discrimination,

where the price of a product when sold in the importing country
is less than the price of that product in the market of the
exporting country.

 Article VI, GATT 1994

 The Agreement on Implementation of Article VI of GATT 1994
(the Anti-Dumping Agreement, ADP)
WTO Members can impose anti-dumping measures, if WTO
Member can confirm:
(a) that dumping is occurring, (“export price” is less than
“normal value”)
(b) that the domestic industry producing the like product is
suffering material injury or threat of material injury, and
(c) that there is a causal link between the two.

Normal value: The foreign home market price

A third country price
Constructed normal value
In China,
 The Ministry of Commerce is responsible for determining
whether imported merchandise is being sold at “dumped”
prices. (in the USA, the Department of Commerce)

 Bureau of Industry Injury Investigation under the Ministry of

Commerce is responsible for determining whether dumped
imports are currently causing or threatening to cause material
injury to a domestic Chinese industry or to materially retard
( 妨碍 ) the establishment of such an industry. (in the USA, the
US International Trade Commission)
 According to WTO statistics, the People’s Republic of China
has been the number one target of antidumping actions filed
by WTO members between 1995-June 30, 2010.
 自 1995 年以来，我国已连续 15 年成为全球遭遇反倾销调查最多的国家，
涉案损失每年高达 300 亿美元～ 400 亿美元 ( 中国贸易救济信息网 ) 。
 During this period, the total number of antidumping initiated
by reporting WTO members was 3752, among which 784
were against China, amounting to 20.9 % of the total.
 Reasons: the world's lowest cost producers.
It is classified as a nonmarket economy.
我国是全球遭遇国外反倾销最多的目标国
国际反倾销案件调查数及中国被发起反倾销数
(01/01/1995-30/06/2010)

中国被发起反倾销数量 世界反倾销立案数
400
350
300
250
200
150
100
50
0

1995 年～ 2010 年上半年，全球反倾销案 3752 起。

我国被发起数 784 起，约占 20.9% 。
 Protocol on the Accession of the People’s Republic of China
Article 15 a (ii):

 The importing WTO Member may use a methodology that is NOT

based on a strict comparison with domestic prices or costs in
China if the producers under investigation cannot clearly show that
market economy conditions prevail （普遍） in the industry
producing the like product with regard to manufacture, production
and sale of that product.

Article 15 (d): the above provisions shall expire 15 years after

the date of accession.
http://finance.sina.com.cn/focus/umdhfq/
　欧盟光伏双反事件回顾

　　 2013 年 8 月 6 日： 达成价格承诺，每瓦 0.56 欧元

2013 年 6 月 5 日： 欧盟对华光伏涉案产品征收 11.8% 的临时反倾销税

　　 2013 年 5 月 28 日：欧盟 17 成员国反对光伏双反 价格承诺成磋商焦点

　　 2013 年 5 月 22 日：中欧光伏双反案价格承诺首轮谈判破裂

　　 2013 年 5 月 16 日：欧盟闭门磋商对华太阳能 47% 反倾销关税

　　 2013 年 2 月 22 日：欧盟酝酿对华光伏双反增加追溯期

　　 2012 年 11 月 8 日：欧盟对中国光伏产品发起反补贴调查

　　 2012 年 10 月 11 日：欧盟公布对华光伏反倾销名单 6 企业被强制应诉

　　 2012 年 9 月 6 日：欧盟对华光伏产品反倾销立案
§2 The Effects of Import Tariffs
1. Concepts of consumer surplus and producer surplus
(1) Consumer surplus:
Price

The difference between the Consumer

amount a consumer would surplus
have been willing to pay and
the amount he pays. P

D
The area under the demand
curve and above the price. 0 Q Quantity
Figure 5-1 Geometry consumer
surplus
(2) Producer surplus

Price S
The difference between the
P
amount a producer would Producers
surplus
have been willing to sell
and the amount he receives.

The area above the supply 0 Q Quantity

Figure 5-2 Geometry producer surplus
curve and under the price.
2. The welfare effects of import tariffs
(1) The welfare effects of an import tariff in a small country

P Net welfare effect:

S
Deadweight loss =
b+d.
Pd
t a b c d
Pw

0 S1 S2 D2 D1 Q

Consumer surplus loss Producer surplus gain

Government revenue
Figure 5-3 The welfare effects of an import tariff in a small country
(2) The effects of an import tariff in a large country

Government revenue:
Rectangle: c+f
P
S Consumer surplus:
a+b+c+d
Producer surplus:
a
Pd
Welfare effect: unclear
t Pw
a b c d
e f g
P'w Rectangle f:

D terms of trade gains

0 S1 S2 D2 D1 Q
Figure 5-4 The welfare effects of an import tariff in a large country
§3 Measurement of Import Tariffs

1. The “height” of import tariffs

Suppose that we have only three imported goods with the

following tariff rates: product A, 15 percent; product B, 20
percent; and product C, 25 percent. The unweighted-
average of these rates is

15% + 20% + 25%

= 20%
3
 Using the tariff rates from the unweighted case, suppose
that the country imports $800,000 worth of product A,
$500,000 worth of product B, and $200,000 worth of product
C.
The weighted-average tariff rate is
(15%)($800,000)  (20%)($500,000)  (25%)($200,000)

$800,000  $500,000  $200,000
$120,000  $100,000  $50,000

$1，500， 000
 18%
 The weighting problem: greater weight to low tariff
goods
The weighted-average tariff rate is therefore biased
downward.

 In the example, suppose Product D: 200%, imports = 0

(prohibitive tariff)
Thus weighted-average tariff rate doesn’t chang. (18%).

 An extreme example:
(Q1, Q2, Q3) × 0% + （ Q4, Q5, …, Qn = 0)× prohibitive rates = 0
Solution: using weights of the goods in world trade.
2. Nominal versus effective tariff rates
(1) Nominal tariff rate
Simplest way to estimate the nominal rate of protection of an
industry, if tariffs are the only barrier that restricts imports and
applied to all imports without exception.
The tariff rate in the tariff schedule

NRP = (Pd / Pi)­1

Pd: domestic market price
Pi: import price
NRP = (Pd­ Pi) / Pi
.
 For domestic producers, of greater interest than the price rise is
the rise in value added.
(2) Effective tariff rate (effective rate of protection, ERP)
A measure of the total effect of the entire tariff structure on the
value added per unit of output in each industry, when both
intermediate and final goods are imported.

ERP: The rate by which the value added increases after the
imposition of tariffs.

VA'- VA
ERP =
VA

VA' : the value added under protection

VA: the value added with free trade
Suppose under free trade: (F: final good, A and B two inputs)
PF = $1,000 , PA = $400, PB = $300.
VA = $1,000 - ($400 + $300) = $300.
Now suppose: tF = 15%, tA = 8%, tB = 5%
P'F = $1,000 + .15 ($1,000) = $1,000 + $150 = $1150
P'A= $400 + .08 ($400) = $400 + $32 = $432
P'B= $300 + .05 ($300) = $300 + $15 = $315
VA′ = $1,150 - ($432 +$315) = $403 > $300
VA'- VA 403 - 300
ERP    34.33%
VA'-
VA VA 300 $403 - $300
ERP = = = 34.33%
VA $300
 t j ­ ∑ i aijt i
ERP = if only one input
T - at
1­ ∑ i aij ERP =
1- a

aij : the free trade value of input i as a percentage of the

free trade value of the final good j.
tj : the tariff rate on the final good j.
ti: the tariff rate on any input i.
∑i: summing over all inputs.

.15 - [ (.40)(.08) + (.30)(.05) ]

ERP = F = 34.33%
1 - (.40 + .30)
Exercise (1)
Car: 180% (tariff rate)
Share of steel, engine, tire: 20%, 30%, 10%
ts= 60%; te= 120%; tt= 30%

ERP? Conclusions?

180%  ( 20%  60%  30%  120%  10%  30%)

 322.5%
1  ( 20%  30%  10%)
Exercise (2)
DESK: price: $20; Wood (only input) : $15;
T = 10%

(1) t = 0%; ERP = ? (1) ERP = 40%

(2) t = 10%; ERP = ? (2) ERP = 10%
(3) t = 20%;
(3) ERP = -20%
CONCLUSIONS?
 t j ­ ∑ i aijt i
ERP =
1­ ∑ i a ij has the advantage of illustrating
three general rules about the relationship
between nominal rates and effective rate of
protection. Rules:
(a) if tj > the weighted average ti, then ERP > tj;
(b) if tj < the weighted average ti, then ERP < tj;
(c) if tj = the weighted average ti, then ERP = tj.

Rule (a) incorporates an escalated tariff structure.

 An ERP can be negative, meaning that the tariffs on inputs
are considerably higher than the tariff on the final goods.

 Thus, the structure of tariffs in this latter situation works to

drive factors of production out of the industry rather than
draw resources in.

 The NRP is useful for assessing the price impact of tariffs

on consumers.

 The ERP is more useful to producers because factors tend

to flow toward industries with relatively higher ERPs.