Chapter 6
Tariffs
This chapter begins a series of four chapters on commercial policy. The aim of this chapter is to introduce
the student to these issues by focusing on tariffs as a commercial policy instrument. The chapter begins
with a review of the gains from international trade. It then turns to a partial equilibrium analysis of tariffs.
Included with this analysis is the standard discussion of deadweight costs. This is followed by treatments
of such issues as the export tariff and the optimal tariff (this section may be skipped without loss of
continuity).
We have found that students appreciate seeing real world illustrations of this material. One way to do this
is to bring to class the U.S. tariff code (or the tariff codes of some other countries) and then to look up for
the students current tariff levels on products of their choosing. (The U.S. tariff code is generally available
in government documents sections of libraries.) We include a small sample of U.S. tariffs in Table 6.1. In
addition, we have provided a boxed item on the welfare costs of U.S. tariffs. Other examples of these costs
can be found in the references at the end of this chapter or, from time to time, in the popular press.
One of the gains from free (or freer) trade that is emphasized in this chapter is the greater availability of
goods at lower prices and, in general, the pro-competitive nature of international trade. A study by James
Levinsohn of the University of Michigan reports on the effects of major tariff reductions in Turkey on
various domestic industries. See “Testing the Imports-as-Market-Discipline Hypothesis” (NBER Working
Paper #3657, March 1991) for complete details. Neil Vousden provides an excellent, but more advanced
treatment of tariffs in his book, The Economics of Trade Protection, Cambridge University Press, 1990.
Chapter 6 Tariffs 25
1. Prove the following proposition: Free trade is better than no trade.
2. Prove the following: Some trade (trade with tariffs) is better than no trade.
3. Suppose that a country imposes a pure revenue tariff. Diagram the welfare effects of this tariff. How
do these effects differ from the usual deadweight costs analyzed in the chapter?
26 Husted/Melvin • International Economics, Ninth Edition
4. The less elastic (i.e., the steeper) is the domestic supply curve, the lower is the production deadweight
cost of any tariff. True or false? Demonstrate and explain.
6. Use the data in the first table of Global Insights 6.2 to calculate U.S. tariff revenues on rubber
footwear, women’s shoes, and luggage.
The answer to this question involves the following identity:
deadweight cost = consumer cost − producer gain − tariff revenue.
Chapter 6 Tariffs 27
7. Given the following information, calculate the cost to consumers, the benefit to producers, the change
in government revenue, and the deadweight costs of a proposed 20 percent tariff on personal
computers.
price of computers (free trade)
$2,000
domestic production (free trade)
100,000
domestic production (after tariff)
120,000
domestic consumption (free trade)
150,000
domestic consumption (after tariff)
140,000
8. The optimal tariff for a small country is zero. Prove this statement geometrically and then explain
your results.
9. Prove that the more elastic demand and supply conditions are in a country that is large in world
markets, the greater the ability of that country to impose an optimal tariff.
A country is more likely to gain by imposing a tariff the less the tariff is reflected in the domestic
price and the more it is reflected in the foreign price. To answer the question, let us show that a tariff
will have a smaller effect on the domestic price the more elastic is domestic demand or supply. Refer
28 Husted/Melvin • International Economics, Ninth Edition
10. Prove that the more inelastic demand and supply conditions are in the foreign country, the greater the
ability of a country that is large in world markets to impose an optimal tariff. Use this result to
explain why the OPEC price increases of the 1970s had such devastating effects on the economies of
the West.
The proofs are similar to those in Question 9. For example, return to Figure 6.10 and imagine a
supply curve in country B that supports the original equilibrium but is otherwise more inelastic. The
cum-tariff equilibrium would have to involve a foreign price that is lower than P. Why? Because of
the new supply conditions, country B would want to export more than before. There would be
a surplus in world markets at the old prices. To reach equilibrium, prices must come down.
11. Suppose a country imposed a specific export tariff of $t on each unit of its exports of a certain
product. Depict this situation graphically, and calculate the welfare cost of this policy.
12. Use the data in Table 6.7 to compare U.S. protectionist policies with those of Japan. In what sectors
are protection levels relatively equal? Where do they differ? Try to explain these patterns.
13. Suppose that the domestic demand and supply for shoes in a small open economy are given by
P = 100 − 2Q (demand)
P = 4 + Q (supply)
where P denotes price and Q denotes quantity.
14. Consider the demand and supply curves in Question 13. Suppose that the world price is $50.
a. What will be the levels of production and consumption under free trade?
b. Will the country be an exporter or an importer if the world price is $50? How much will it want
to trade?