IPE_2
2. Tariff Barriers to Trade
● Tariffs – the simplest trade policy – are on average quite low nowadays (between
developed countries), but their effects are important to understand other trade
policies. Non-tariff barriers to international trade have become more important
over the last two decades.
● Non-tariff barriers to trade include inter alia import quotas (limitations on the
quantity of imports), export restraints (limitations on the quantity of exports),
technical regulations and product standards
● Defined as taxes on imports, tariffs come in two types:
○ Specific tariffs: Fixed charges per unit (e.g., $3/barrel of oil).
○ Ad valorem tariffs: A percentage of the imported goods' value.
● Explores their effects using partial equilibrium analysis, focusing on single
markets.
3. Market Dynamics Under Tariffs
● Examines how tariffs influence supply, demand, and pricing between two trading
nations (Home and Foreign).
● Describes the derivation of:
○ Import demand curves for Home (based on the difference between demand
and supply at each price). Downward sloping MD= D-S
○ Export supply curves for Foreign. Upward sloping XS*= S*-D*
● Discusses world equilibrium where import demand equals export supply. World
demand = world supply
4. Effects of Tariffs
A tariff raises the price in Home while lowering the price in Foreign and the volume
traded declines
● Symmetric Countries: Countries of comparable economic size.
○ Tariffs increase domestic prices, reduce imports, and create inefficiencies.
● Asymmetric Countries: Smaller domestic economies face greater price increases
and sharper import reductions.
● Analyzes costs and benefits through changes in:
○ Consumer surplus (reduced due to higher prices). Difference in the price
actually paid from the max willingness to pay (area under demand curve,
above price)
○ Producer surplus (increased due to higher domestic prices). Difference in
price received from min willingness to sell price (area bore supply curve
below price)
○ Government revenue (tariffs collected on reduced import volumes).
5. Welfare Effects
● Tariffs cause efficiency losses (distorted consumption and production incentives)
but may yield terms-of-trade gains for large countries.
● Net effects vary:
2. Tariff Barriers to Trade
● Tariffs – the simplest trade policy – are on average quite low nowadays (between
developed countries), but their effects are important to understand other trade
policies. Non-tariff barriers to international trade have become more important
over the last two decades.
● Non-tariff barriers to trade include inter alia import quotas (limitations on the
quantity of imports), export restraints (limitations on the quantity of exports),
technical regulations and product standards
● Defined as taxes on imports, tariffs come in two types:
○ Specific tariffs: Fixed charges per unit (e.g., $3/barrel of oil).
○ Ad valorem tariffs: A percentage of the imported goods' value.
● Explores their effects using partial equilibrium analysis, focusing on single
markets.
3. Market Dynamics Under Tariffs
● Examines how tariffs influence supply, demand, and pricing between two trading
nations (Home and Foreign).
● Describes the derivation of:
○ Import demand curves for Home (based on the difference between demand
and supply at each price). Downward sloping MD= D-S
○ Export supply curves for Foreign. Upward sloping XS*= S*-D*
● Discusses world equilibrium where import demand equals export supply. World
demand = world supply
4. Effects of Tariffs
A tariff raises the price in Home while lowering the price in Foreign and the volume
traded declines
● Symmetric Countries: Countries of comparable economic size.
○ Tariffs increase domestic prices, reduce imports, and create inefficiencies.
● Asymmetric Countries: Smaller domestic economies face greater price increases
and sharper import reductions.
● Analyzes costs and benefits through changes in:
○ Consumer surplus (reduced due to higher prices). Difference in the price
actually paid from the max willingness to pay (area under demand curve,
above price)
○ Producer surplus (increased due to higher domestic prices). Difference in
price received from min willingness to sell price (area bore supply curve
below price)
○ Government revenue (tariffs collected on reduced import volumes).
5. Welfare Effects
● Tariffs cause efficiency losses (distorted consumption and production incentives)
but may yield terms-of-trade gains for large countries.
● Net effects vary:
