Evaluate each of the following statements. Include a statement on each of the fo

Question

Evaluate each of the following statements.

Include a statement on each of the following. Do NOT include a one work answer.

1.) A tariff on textiles is equivalent to a tax on consumers and a subsidy to the textile producers and workers.

2.) A tariff lowers the real income of the country, while at the same time it distributes income from the consumers to the governments and to the import-competing industires.

3.) Chinese mushrooms undersell American mushrooms because chinese labor is cheaper than American labor. We should impose a high tariff on mushrooms until China agrees to raise wage rates to the level prevailing in the US.

Explanation / Answer

Tariffs are the most common kind of barrier to trade; indeed, one of the purposes of the WTO is to enable Member countries to negotiate mutual tariff reductions. Before we consider the legal framework that provides the discipline regarding tariffs, we must understand the definition of tariffs, their functions, and their component elements (rates, classifications, and valuations).A tariff is a tax imposed on the import or export of goods.1 In general parlance, however, it refers to "import duties" charged at the time goods are imported. 2

Tariffs have three primary functions: to serve as a source of revenue, to protect domestic industries, and to remedy trade distortions (punitive function).
The revenue function comes from the fact that the income from tariffs provides governments with a source of funding. In the past, the revenue function was indeed one of the major reasons for applying tariffs, but economic development and the creation of systematic domestic tax codes have reduced its importance in the developed countries. For example, Japan generates about one trillion yen in tariff revenue, but this is less than two percent of total tax revenues (fiscal 1996). In some developing countries, however, revenue may still be an important tariff function.
Tariffs is also a policy tool to protect domestic industries by changing the conditions under which goods compete in such a way that competitive imports are placed at a disadvantage. In point of fact, a cursory examination of the tariff rates employed by different countries does seem to indicate that they reflect, to a considerable extent, the competitiveness of domestic industries. In some cases, "tariff quotas" are used to strike a balance between market access and the protection of domestic industry. Tariff quotas work by assigning low or no duties to imports up to a certain volume (primary duties) and then higher rates (secondary duties) to any imports that exceed that level.
The WTO bans in principle the use of quantitative restrictions as a means of protecting domestic industries but does allow tariffs to be used for this purpose.3 The cost of protecting domestic industry comes in the form of a general reduction in the protecting country's economic welfare and in the welfare of the world economy at large, but tariffs are still considered to be more desirable than quantitative restrictions.

1. Trade barriers raise the real income of scarce factors, which gives them a big incentive to lobby for protection

(c)In the short run with fixed prices,
nominal and real exchange rates are equivalent.


Tariff Rates

Obviously, one of the most important components in tariff measures is the rate at which the tariff is imposed.
As noted in the discussion of the three functions of tariffs, any imposition of a tariff has the potential to reduce the welfare of the world economy as a whole. Since 1947, the GATT has been the standard bearer in an on-going process of reducing tariff levels. During tariff negotiations (known as "rounds," the most recent of which was the "Uruguay Round"), countries set ceilings on their tariff rates. This is known as the "bound rate" and refers to the highest allowable rate, in contrast to the rate that is actually applied, which is referred to as the "effective rate." The GATT has been successful in encouraging mutual reduction of these rates. Since the conclusion of the Uruguay Round, there have been further efforts to reduce tariffs in specific sectors. One example is the "Information Technology Agreement" (ITA), which successfully removes tariff barriers to information equipment and technology.
In recent years, voluntary tariff reductions which arise out of the recognition that countries can spur their economic development by proactively liberalizing their trade have been made in accordance with the Individual Action Plans (IAP) of APEC members.
The Uruguay Round resulted in a final average bound rate for industrial goods (weighted average by trade volume) of 1.5 percent in Japan, 3.6 percent in the United States, 3.6 percent in the EU, and 4.8 percent in Canada. Japanese rates are thus comparatively low.

Average Tariff Rates
   Japan U.S EC Canada All goods:
Simple average bound rate (1999)
Simple average applied rate (1996)
4.8%
6.7%
3.8%
6.2%
7.2%
9.5%
5.0%
9.2%
Industrial goods:
Import-weighted average applied rate(1999) 1.5% 3.6% 3.6% 4.8%

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