David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 28 International trade
The economics of tariffs
Trade policy affects
international trade through
taxes or subsidies, or by direct
restrictions on imports and
exports.
An tariff is a tax on imports.
We now turn from the determinants of international trade to international trade
policy.
The most common type of trade restriction is a tariff or import duty.
If tis the tariff rate as a decimal fraction (for example, 0.2), the domestic price of
an imported good is ( 1 + t) times its world price. By raising the domestic price of
imports, a tariff helps domestic producers but hurts domestic consumers.
The free trade equilibrium
Figure 28.3 shows the domestic market for cars. The UK faces a given world price of cars, say £10 000 a car,
shown by the solid horizontal line. Schedules DD and SS show the demand for cars by UK consumers and
the supply of cars by UK producers. For simplicity, we assume that domestic and foreign cars are perfect
substitutes. Consumers buy the cheaper one.
At a price of £10 000, UK consumers wish to buy Qd cars, at point G on their demand curve. Domestic
firms wish to make Os cars at this price. The gap between domestic supply Os and domestic demand Od is
imported.
Equilibrium with a tariff
Suppose that the government levies a 20 per cent tariff on imported cars. Car importers charge £12 000 to
cover their costs, inclusive of the tariff. The broken horizontal line at this price shows that importers will
sell any number of cars in the domestic market at a price of £12 000. The tariff raises the domestic tariffinclusive
price above the world price.
SS
41 £12 000
u
'i::
D..
£10 OOO -------..-----...,
Figure 28.3
: Imports :
:._ofter-.:
tariff
World price
plus tariff
G
World price '\...-
:'.
:
I
DD
: Imports :
1 -
:-.. before - -•:
ṯa _
r _
iff
Q'
s
Q Qd
Quantity
The effects of a tariff
DD and SS show the domestic demand
and supply for cars. In the absence of
a tariff, consumers can import cars at
a price of £10 000. In free trade
equilibrium, domestic producers produce
at C and domestic consumers consume
at G. The quantity of imported cars is
CG. Qd is the total quantity demanded.
Domestic production O. is supplemented
by imports (Qd - QJ A 20 per cent tariff
raises the domestic price of imports to
£12 000. Domestic output is now at E
and consumers consume at F. Imports
foll from CG to EF.
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