TIẾNG ANH CHUYÊN NGÀNH 3 – NHÓM FIRE

UNIT 1: INTERNATIONAL TRADE

TOPIC: THE THEORY OF TARIFFS AND QUOTAS

INTRODUCTION (VUONG)
PART 1: OBSTACLE GAMES (VUONG)
1. The practice of selling products at a very low price in an export market (7
words) DUMPING
2. They separate countries and can make trade more difficult. (7 words)
BORDERS
3. Limited numbers or amounts that are officially allowed. (6 words) QUOTAS
4. Taxes paid on goods coming into or going out of a country. (7 words)
TARIFFS
5. An agreement established in 1947, and last ratified in 1994, between 23
contries on a set of rules for trade between them. (4 words) GATT (General
Agreement on Tariffs and Trade)
6. An organization established in 1995 to promote fair trade among its
members. Its uses a system of trading rules to solve trading disputes. When a
country has been found to be in violation, most often the offending country
changes its trade policy to come into conformance. (3 words) WTO (World
Trade Organization)
7. To give money to a company or industry to make a product cheaper to buy or
produce. (9 words) SUBSIDISE
8. The removal or reduction of government controls on a particular business
activity (12 words) DERGULATION

PART 2: PRESENTATION – THE THEORY OF TARIFFS AND

QUOTAS
2.1. The theory of tariffs
2.1.1. Definition: (HOA 2.1.1+ 2.1.2)
 Tariffs, which are taxes on imports of commodities into a country or
region, are among the oldest forms of government intervention in
economic activity.
 Tariffs are widely used to protect domestic producers’ incomes from
foreign competition. This protection comes at an economic cost to
domestic consumers who pay higher prices for import- competing goods,
 and to the economy as a whole through the inefficient allocation of
resources to the import competing domestic industry.
=> A tariff is a tax imposed on goods when they are moved across a
political boundary. They are usually associated with protectionism, the
economic policy of restraining trade between nations. For political reasons,
tariffs are usually imposed on imported goods, although they may also be
imposed on exported goods.

2.1.2. Types of Tariffs:

Tariffs can be classified as:
 Specific tariffs
Taxes that are levied as a fixed charge for each unit of goods imported
Example: A specific tariff of $10 on each imported bicycle with an
international price of $100 means that customs officials collect the fixed sum of
$10.
 Ad valorem tariffs
Taxes that are levied as a fraction of the value of the imported goods
Example: A 20% ad valorem tariff on bicycles generates a $20 payment on
each $100 imported bicycle.
 A compound duty (tariff) is a combination of an ad valorem and a
specific tariff.
 Modern governments usually prefer to protect domestic industries
through a variety of nontariff barriers, such as:
 Import quotas: Limit the quantity of imports
 Export restraints: Limit the quantity of exports
2.2. The impact of tariffs (LOI 2.2.1 + 2.2.2)
2.2.1. The Effect of a Tariff on Price, Output, and Consumption
• Two key concepts in the analysis of the impact of tariffs
– Consumer surplus: is the difference between the highest price a
consumer is willing to pay and the actual market price of the goods.
(can be measured only if the demand curve is known)
– Producer surplus: is the difference between the market price and the
lowest price a producer would be willing to accept. (can be measured
only if the supply curve is known)
2.2.1. The Effect of a Tariff on Price, Output, and Consumption
Tariffs increase the prices of imported goods. Because of this, domestic
producers are not forced to reduce their prices from increased competition, and
domestic consumers are left paying higher prices as a result. Tariffs also reduce
efficiencies by allowing companies that would not exist in a more competitive
market to remain open.

The figure below illustrates the effects of world trade without the presence of a
tariff. In the graph, DS means domestic supply and DD means domestic
demand. The price of goods at home is found at price P, while the world price is
found at P*. At a lower price, domestic consumers will consume Qw worth of
goods, but because the home country can only produce up to Qd, it must import
Qw-Qd worth of goods.
 Figure 1: Trade without tariffs
When a tariff or other price-increasing policy is put in place, the effect is to
increase prices and limit the volume of imports. In the figure below, price
increases from the non-tariff P* to P'. Because the price has increased, more
domestic companies are willing to produce the good, so Qd moves right. This
also shifts Qw left. The overall effect is a reduction in imports, increased
domestic production, and higher consumer prices.
2.2.2. Tariff’s Effect on Resource Allocation and Income Distribution
Besides the rise in prices and fall in imports, tariffs influence
 Resource Allocation
As consumers spend more on goods on which the duty is imposed, they have
less to spend on other goods—so, one industry is propped up to the
disadvantage of all others. This results in a less efficient allocation of resources,
which can then result in slower economic growth. Tariffs also tend to be
regressive in nature, burdening lower-income consumers the most.
 Income Distribution
– Inputs in domestic production: the increase in domestic production
requires additional resources of land, labor, and capital to be
reallocated from their prior uses

2.2.3. The Effects of a Tariff on National Welfare in Sum (CHI 2.2.3 +

2.2.4+ 2.2.5)
• Overall Effect of the Tariff on Welfare
• Note, we do not care whether the consumers facing higher prices are rich
or poor, and do not care whether the specific factors in the industry earn a
lot or a little.
• The overall impact of the tariff in the small country can be summarized as
follows:
 Fall in consumer surplus -(a+b+c+d)
Rise in producer surplus +a
Rise in government revenue +c
Net effect on Home welfare -(b+d)
• The areas b and d in figure 4 (a) correspond to the triangle (b+d) in figure
4 (b) and is the net welfare loss.
 We refer to this area as a deadweight loss—it is not offset by a
gain elsewhere in the economy.
2.2.4. Other Potential Costs of a Tariff
• A tariff may have effects that are less predictable and harder to
quantify
– Retaliation by other countries: adds to the net loss of a tariff by hurting
export markets of other industries; can escalate rapidly
– Innovation: tariffs reduce competitive pressures on domestic firms and
thus their incentives to innovate and improve the quality of existing
products.
– Rent seeking: any activity that uses resources in order to capture more
income without actually producing a good or survive (e.g., firms hire
lobbyists to maintain tariff protection)
Political systems that do not easily provide tariffs are more likely to avoid
rent seeking
2.2.5. Conclusion
– 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.
– 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.
– There are costs to tariffs, however, now the price of the good with the
tariff has increased, the consumer is forced to either buy less of this good
or less of some other good. The price increase can be thought of as a
reduction in consumer income. Since consumers are purchasing less,
domestic producers in other industries are selling less, causing a decline
in the economy.
2.3. Introduce the theory of quotas (PHUONG 2.3.1+ 2.3.2 + 2.3.3)
2.3.1. Denifition:
 An import quota is a type of protectionist trade restriction that sets a
physical limit on the quantity of a good that can be imported into a
country in a given period of time.
 Quotas, like other trade restrictions, are used to benefit the producers of a
good in a domestic economy at the expense of all consumers of the good
in that economy.
  Critics say quotas often lead to corruption (bribes to get a quota
allocation), smuggling (circumventing a quota), and higher prices for
consumers.
 In economics, quotas are thought to be less economically efficient than
tariffs which in turn are less economically efficient than free trade.
-Reasons for import quotas:
+To protect domestic producers by placing a limit on the amount of goods
allowed to enter the country.
+To force companies of other nations to compete against one another for the
limited amount of imports allowed.
-Reasons for export quotas:
+To maintain adequate supplies of a product in the home market.
+To restrict supply on world markets, thereby increasing the international price
of the good.

2.3.2. Types of Quotas:

– Limitation on the quantity of imports: e.g., a limit on the quantity of
imports from country x, or a limit on the quantity of imports from the rest
of the world as a whole
– Import licensing requirement: forcing importers to obtain government
licences for their imports; government regulates the number of licences
available
– Voluntary export restraint (VER) (or voluntary restraint agreement,
VRA): the exporting country “voluntarily” agrees to limit its exports for a
period.
– VERs have similar effects as quotas
o However, VERs are more popular, as they (1) do not require
domestic legislative action; and (2) allow politicians to provide
protection for domestic industry and to appear as proponents of
free trade
– The use of VERs increased with the decline in tariffs that results from the
global trade rounds; however, recent international negotiations have
restricted the use of VERs.
2.3.3. Analysis of Quota: The Effect on the Profits of Foreign Producers
• Quota rents: increased profits accruing to foreign producers from
the use of quotas; take the place of tariff revenue
 • In the case of a tariff, the government earned revenue from imports;
in the case of a quota, foreign producers receive extra profits (c)
• Domestic firms prefer quotas over tariffs: post-quota increase in
consumer demand increases the price paid by consumers and thus the
quantity of producer surplus
– In contrast, increase in demand for a good with an import tariff
increase the quantity of imports and leaves the price of the good
intact
2.4. Compare quotas and tariffs (LAN ANH)
• Similarities between quotas and tariffs
– Both lead to a reduction in imports, a fall in total domestic
consumption, and an increase in domestic production
• Differences between quotas and tariffs
– Tariff limits imports by imposing a tax on them
– Tariffs bring revenues to the government whereas quotas do not
generate tariff revenue for the government
– Quotas could be more effective than tariffs particularly when the
domestic demand and supply curves for the import good are inelastic.
– The terms of trade effects of tariffs are determinate or predictable, but
those resulting from quotas are indeterminate or unpredictable.
– Domestic producers, importers and even governments, may prefer
quotas to tariffs for the following reasons:
 From the government’s point of view, quotas are easy to impose, remove,
change and administer.
  Secondly, international attitude is more permissive on quotas than on
tariffs.
 Thirdly, high tariff levels necessary to achieve significant import
reductions could seriously damage the public image of the protected
industry. For this reason, the domestic producers may prefer “invisible’
quota protection to the ‘Visible’ tariff protection.
 Fourthly, as the total demand for the product grows, a given quota fixed
in absolute terms would be more protective to the domestic producers. A
tariff, on the other hand, would not prevent foreign imports gaining their
share of the expanded market in the protected sector of the economy.
 Fifthly, it may be argued that quotas allow at least some imports into the
country, while tariffs may be too prohibitive to allow any imports at all.
This may have relevance from the standpoint of consumers of the
imported product.
 Finally, the possibility of capturing good profits from the quota would be
a strong reason for the importers to press for quota method rather than the
tariff method.
PART 3: QUESTIONS (VUONG)
Question 1: One of the reasons that protectionists and government officials
may favor using a quota instead of a tariff is:
(a) Quotas generate more revenue for the government than do tariffs.
(b) A quota ensures that the quantity of imports is strictly limited.
(c) Quotas create less market distortions than do tariffs.
(d) Quotas give less power to politicians than do tariffs.
Question 2: A quota:
(a) Causes domestic prices to fall.
(b) Causes world prices to rise.
(c) Restricts the quantity of a good that can be imported.
(d) Is always more efficient than a tariff.
Question 3: A tariff:
(a) raises the price of imported goods, increasing the demand for domestic
substitutes
(b) lowers the cost of producing domestic goods
(c) offsets the effect of a quota
(d) raises the price of domestic goods, lowering the demand for them
KEY: 1b , 2C, 3a