A tariff is a duty levied on a product when it crosses national borders. The most popular tariff is the import tariff, which is tax levied on an imported product.
Most of the time, tariff is imposed for protection or revenue purposes. A protective tariff is designed to insulate import-competing producers from foreign competition. Though protective tariff is not indented to totally prohibit imports from entering the country, it does place foreign producers at a competitive disadvantage when selling in the market. A revenue tariff is imposed for the purpose of generating tariff revenues and may be placed on either export or imports.
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The important thing to be considered about tariff is who gains and who suffers. It means the impact of tariff on stakeholders. Government gains, because it gains revenue from the tariff. Domestic producers gain, because tariff protects them from foreign competitors. Consumers lose because they pay more.
In general, two conclusions can be derived from the effect of import tariff. First, tariff is pro-producer and anti-consumer (domestic). While tariff protects domestic producer, at the same time it increases domestic price of the product.
Second, Import tariff reduces overall efficiency of the world economy (large country). It reduces efficiency because protective tariff encourages domestic firms to produce more at home, but they can produce more efficiently abroad. The result is insufficient using resources.
Besides, tariff raises employment in the protected industry (such as steel) by increasing the price of competing import goods. Industries that are primary suppliers of inputs to the protected industry also gain jobs. However, industries that purchase the protected product (such as auto manufactures) face higher costs. These costs are then passed on to the consumer through higher prices, resulting in decreased sales. Thus unemployment falls in these related industries.
Tariff Welfare Effects (large country)
Source of: http://internationalecon.com, International Trade Theory and Policy
Welfare Effect of Tariff
Welfare Effects of Import Tariff on Steel
Source: Suranovic S. (2004), International Trade and Investment Policy, ch 90
The consumers are affected by the market price. High price will reduce the consumer surplus because tariff reduces the purchasing power of consumers. As it is mentioned in the table, consumer loses: – (A+B+C+D).
Producers are also affected by the market price. An increase market price will lead to increase the supply, and producer surplus will rise. High price is an incentive for the producers to increase production. It is obvious from the table producer gains: +A
The government receives revenue as government impose import tariff. Beneficial from the revenue depends on how government will spend it. + (C+G)
Domestic welfare is summing gains and losses of the stakeholders. As a result, the domestic welfare is positive. +G-(B+D).
Tariff Effects on
Exporting Country’s Consumers
As a result of the tariff, export county’s consumers are happy. The price reduction in the export countries increases consumer surplus. . A decrease in the market price will lead to an increase in the quantity purchased and a large consumer surplus. +e
Exporting Countries’ Producers
Tariff leads price falls in the exporting country and the producer surplus reduces. Production decrease because, demand for the product diminish as it mentioned above for the large country.
Exporting Country’s Government
Export country gains nothing, as tariff has no effect on the revenue. 0
Exporting Countries’ Welfare
As usual the aggregate welfare is the summing of the gains and losses to consumers and producers. The welfare of the exporting country decreases. – (f+g+h)
Tariff Effects on:
If small country imposes tariff, it does not affect the world price. Contrary, if large country imposes import tariff it reduces the world price of the product as the demand decrease. If the world price falls, it diminishes world production and consumption. So the world welfare reduces. – (B+D)-(f+h)
Bush’s Steel Tariff Case of U.S.
Background of the Case
Steel has traditionally been a very important industry worldwide. Steel is an important ingredient and symbol of an economy. As a result, governments around the world are willing to be highly protective of their steel industry. Global consumption of steel rose from 28million tons at the twentieth century to 780 million tons at the end-an average increase of 3.4 percent per year.
Source: Michael, R. Czinkota (2005), International Business, 7th edition, part 2, p137
America is one of the world’s largest steel producer and consumer. But 31 American steel producers went bankruptcy, because of the cheap steel import.
In November 2001, the International Trade Commission realized that the U.S industry had suffered serious injury from imports. It recommended that president impose tariff from 15 percent to 40 percent, depending on the type of the steel. Substantial tariffs on steel imports would raise U.S domestic price and will boost the industry.
Without protection, nearly 60,000 U.S steel workers can lose their jobs. Besides, there are many steel consumers, such as automakers and construction companies. Increase the price hurt the consumers’ businesses. Steel consuming producers argue that because of the high price, they would lose competition with foreign rivals.
Imposing tariffs on steel imports goes against U.S trade liberalization and EU warned U.S.
Making the Decision
President George W. Bush faced difficulties. If he eliminated the tariff it would lead more domestic steel producers to bankruptcy. On the other hand if he did too much of the tariff, it would cause trade war with steel-producer countries. On 5th of March 2002, President Bush decided to impose 30 percent tariff on importing steel.
President Bush’s Steel Trade Remedy Program of 2002-2003
Semi finished slab
Plate, hot-rolled sheet, cold-rolled sheet
Tin mill products
Welded tubular products
Carbon and alloy flanges
Stainless steel bar
Stainless steel rod
stainless streel wire
Source: Robert, J. Carbaugh (2006), International Economics,10th edition, ch 4,p122
According to political, it was the most aggressive action take by George Bush in order to protect domestic steel industry. http://www.bized.co.uk/images/steel_tariff.gif
As it was expected, the first reaction was by leading steel-producing countries. America’s largest trading partner EU also increased its tariff against U.S producers. But Japan, South Korea, Brazil and Australia promised to take the United States to WTO arbitration panel. Despite U.S officials protested that it was just temporary “safeguards”. According to EU’s Trade commissioner, Pascal Lamy: “The international market is not the Wild West where everyone acts as he pleases”. German Chancellor Gerhard Schroeder declared the Bush decision “against free world markets”, while French President Jacques Chirac called the move “serious and unacceptable”.
The Major steel-Producing Countries, 2001 and 2000
Source: Michael, R. Czinkota (2005), International Business, 7th edition, part, p138
Russians said the tariff had a profound impact on the relations between the two countries. Russian official claimed that U.S hit a blow to one of the Russia’s major export industries. As a result, in March 2002, Russia began trade war between U.S as putting embargo against U.S poultry import as a reason of health concern.
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Impact of tariff on domestic market
The Bush tariff provided some relief to U.S. steelmakers from cheap imports. But some cost-cutting occurred among steelmakers during 2002-2003: some producers merged and labor contracts were renewed. Large number of U.S. companies who use steel for production opposed against the Bush tariff. Chief executives of these firms noted that, tariff drove up their costs and imperiled more jobs across the manufacturing belt than they saved in the steel industry. President Bush found himself in difficult situation by opposing interests of steel producers and steel users.
Removing “Bush” tariff
After reviving the steel industry, Bush removed steel tariff in December 2003. He noted that the tariff provided steelmakers time for restructuring and regain competitiveness. But his removal of the tariff was primarily in response to the WTO’s ruling.
Impact of tariff on stakeholders
However, both the issuing and the lifting of the tariffs caused controversy in the United States. All evidence points to the fact that the move seemed to have backfired as the price of raw material have risen, inadequate supply of these raw materials (steel scrap) leading to delivery delays, all of which are transferred to the consumers of steels (automobile manufactures) in form of high prices. In some cases, these steel consumers found it even cheaper to source from abroad, further cutting the steel market in the U.S. and eventually loss of jobs. Most of the car makers shifted their resource from steel to plastic. It left the consumers such as automobile makers to competitive disadvantage situation; because car prices were high and low quality (most of the parts were plastic). Steel scrap is an essential raw material for steel mills around the world. Mini-mills, which run on electricity instead of coal-fired furnaces, produce about one-third of the world’s roughly 900 million metric tons, and they rely exclusively on scrap steel. Nucor Corp. a Charlotte, N.C., a large U.S. steelmaker that operates electricity-fired furnaces, raised prices on its steel-sheet products by $40 a ton as rising demand gave it room to pass on rising raw-material costs to customers. Weirton Steel Corp. followed suit by adding a $25/ton surcharge to all its products. These price hikes has made U.S. steel uncompetitive in the global market. In addition, non-unionized and more efficient steel company (Nucor Steel Corp.), have as a result of the move, taken most of the market share from unionized company’s operating old lines. The tariff also meant that Europe was bound to be flooded by the diverted steel, which was cause for concern. However, by 2002, whatever global steel glut that existed had vanished as a booming Chinese economy sucked in more steel imports, further undermining the American steel market. Hence, other foreign producers took the advantage presented by the emerging markets and kept the steel trade going while the U.S. suffered.
Amid the fears of the tariffs imposed on steel imports, many in the U.S. regarded the move as wealth destroying and politically escapable. They argued that it did nothing to help the people it intended to in the short term and it failed to address the ensuing high costs, including ‘legacy liabilities’ in health-care and pension benefits. The argument that the tariff gave the steel industry breathing space to adapt to a new market, has been viewed by some as the developed world version of the old ‘infant industries’ line that has long been discredited by the Third World.
In the global arena, the United States poised at the receiving end of retaliatory levies from Japan and some European countries. The Japanese threatened to impose retaliatory duties on a range of American products, from steel to gasoline and clothing if the U.S. did not drop the tariffs on foreign steel imports the WTO considered illegal. This move was intended to add $85 million a year to the price of American goods exported to Japan. Similarly, in August 2002, the WTO told the European Union it could impose some $2.2 billion in punitive tariffs on imports from the United States, ranging from textiles to pool tables and citrus products. Under retaliatory threat, the Bush’s administration spent a good deal of time coming up with a package that would both avert a trade war and blunt criticisms from the domestic steel industry and its workers. The tariffs were lifted by Bush on December 4, 2003.
The lifting of the 30 percent steel tariff was welcomed with applause although the administration indicated that it will still be ‘monitoring’ imports in order to ‘respond’ if cheap steel surges into the U.S. A major trade war was consequently avoided and within minutes of the announcement, the European Union had dropped its threat of retaliatory tariffs on $2.2 billion of U.S. products. Also joining the celebration were U.S. steel-consuming industries that had watched prices jump by more than 30%. An International Trade report found that in their first year alone the levies exacted a $680 million hit on the economy. Soon after the tariffs were lifted, steel prices in the U.S. rose. This continued through the first quarter of 2004. As of early April, 2004, steel warehouses saw no sign of significant in-bound steel from foreign shores that could drive the price of steel down to the level it had reached before Bush withdrew the tariffs. This indicates that U.S. steel producers may have improved its equipment and processes as intended, thereby, putting them at favorable competitive stance to trade steel within and outside the U.S. This can be improved more, if U.S. manufacturers reach a deal with labor unions in order to rid the industry of its legacy costs to employees. Though tariff saved about 60,000 of Americans who worked for steel using manufactures, it increased unemployment in steel consuming industries such as automobile manufacturers.
The lessons from this act of protectionism vary among individuals and groups of individuals. Indeed, some of the president’s political opponents, such as Representative Dick Gephardt, criticized the plan for not going far enough and some of the steel manufacturers advocated for more time and that tariff exemptions should not be made to countries, especially those that were threatening to impose retaliatory duties. The early withdrawal of the tariffs also drew political criticism from steel producers, as well as supporters of protectionism, but was cheered by proponents of free trade and steel importers.
It is however, difficult to determine with certainty if President Bush’s tariffs was the necessarily way to go. We have seen that while the tariffs have been somewhat restrictive, they have not fully prevented foreign steel from coming into the United States. In the global economy today – where the tenets of free trade have been embraced by most nations, where nations are seeking ways of conveniently eliminating barriers to trade for the purpose of domestic and international economic emancipation – the lesson learned is that protectionism will always backfire and it is in the best interest of the U.S. and other nations to stick to and defend the free trade principles.