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Silicon Valley let out a sigh of relief on Wednesday when it learned that President Donald Trump’s tariff bonanza included an exemption for semiconductors, which, at least for now, won’t be subject to higher import duties. But just three days later, some US tech companies may be finding that the loophole actually creates more problems than it solves……..Continue reading…..
By: Will Knight
Source: WIRED
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Critics:
Economic analyses of tariffs generally find that tariffs distort the free market and increase prices of both foreign and domestic products. The welfare effects of tariffs on an importing country are usually negative, even if other countries do not retaliate, as the loss of foreign competition drives up prices for domestic goods by the amount of the tariff.
The diagrams at right show the costs and benefits of imposing a tariff on a good in the domestic economy under the standard model of tariffs in a competitive economy. Because of its importance, simplicity, and widespread applicability, this microeconomic model of tariffs is usually taught in introductory (first-year) microeconomics courses.
Imposing an import tariff has the following effects, shown in the first diagram in a hypothetical domestic market for televisions:
- Price rises from world price Pw to higher tariff price Pt.
- Quantity demanded by domestic consumers falls from C1 to C2, a movement along the demand curve due to higher price.
- Domestic suppliers are willing to supply Q2 rather than Q1, a movement along the supply curve due to the higher price, so the quantity imported falls from C1−Q1 to C2−Q2.
- Consumer surplus (the area under the demand curve but above price) shrinks by areas A+B+C+D, as domestic consumers face higher prices and consume lower quantities.
- Producer surplus (the area above the supply curve but below price) increases by area A, as domestic producers shielded from international competition can sell more of their product at a higher price.
- Government tax revenue is the import quantity (C2 − Q2) times the tariff price (Pw − Pt), shown as area C.
- Areas B and D are deadweight losses, surplus formerly captured by consumers that now is lost to all parties.
The overall change in welfare = Change in Consumer Surplus + Change in Producer Surplus + Change in Government Revenue = (−A−B−C−D) + A + C = −B−D. The final state after imposition of the tariff has overall welfare reduced by the areas areas B and D. The losses to domestic consumers are greater than the combined benefits to domestic producers and government.
That tariffs overall reduce welfare is not controversial among economists. For example, the University of Chicago surveyed about 40 leading economists in March 2018 asking whether “Imposing new U.S. tariffs on steel and aluminum will improve Americans’ welfare.” About two-thirds strongly disagreed with the statement, while one third disagreed.
None agreed or strongly agreed. Several commented that such tariffs would help a few Americans at the expense of many. This is consistent with the explanation provided above, which is that losses to domestic consumers outweigh gains to domestic producers and government, by the amount of deadweight losses.
Tariffs are generally more inefficient than consumption taxes. A 2021 study found that across 151 countries over the period 1963–2014, “tariff increases are associated with persistent, economically and statistically significant declines in domestic output and productivity, as well as higher unemployment and inequality, real exchange rate appreciation, and insignificant changes to the trade balance.”
Tariffs do not determine the size of trade deficits: trade balances are driven by consumption. Rather, it is that a strong economy creates rich consumers who in turn create the demand for imports. Industries protected by tariffs expand their domestic market share but an additional effect is that their need to be efficient and cost-effective is reduced.
This cost is imposed on (domestic) purchasers of the products of those industries, a cost that is eventually passed on to the end consumer. Finally, other countries must be expected to retaliate by imposing countervailing tariffs, a lose-lose situation that would lead to increased world-wide inflation.[
For economic efficiency, free trade is often the best policy, however levying a tariff is sometimes second best. A tariff is called an optimal tariff if it is set to maximise the welfare of the country imposing the tariff. It is a tariff derived by the intersection between the trade indifference curve of that country and the offer curve of another country.
In this case, the welfare of the other country grows worse simultaneously, thus the policy is a kind of beggar thy neighbor policy. If the offer curve of the other country is a line through the origin point, the original country is in the condition of a small country, so any tariff worsens the welfare of the original country.
It is possible to levy a tariff as a political policy choice, and to consider a theoretical optimum tariff rate. However, imposing an optimal tariff will often lead to the foreign country increasing their tariffs as well, leading to a loss of welfare in both countries. When countries impose tariffs on each other, they will reach a position off the contract curve, meaning that both countries’ welfare could be increased by reducing tariffs.
For the purpose of assessment of customs duty, products are given an identification code that has come to be known as the Harmonized System code. This code was developed by the World Customs Organization based in Brussels. A ‘Harmonized System’ code may be from four to ten digits. For example, 17.03 is the HS code for molasses from the extraction or refining of sugar.
However, within 17.03, the number 17.03.90 stands for “Molasses (Excluding Cane Molasses)”. The national customs authority in each country is responsible for collecting taxes on the import into or export of goods out of the country. Evasion of customs duties takes place mainly in two ways. In one, the trader under-declares the value so that the assessable value is lower than actual.
In a similar vein, a trader can evade customs duty by understatement of quantity or volume of the product of trade. A trader may also evade duty by misrepresenting traded goods, categorizing goods as items which attract lower customs duties. The evasion of customs duty may take place with or without the collaboration of customs officials. Many countries allow a traveller to bring goods into the country duty-free.
These goods may be bought at ports and airports or sometimes within one country without attracting the usual government taxes and then brought into another country duty-free. Some countries specify ‘duty-free allowances’ which limit the number or value of duty-free items that one person can bring into the country. These restrictions often apply to tobacco, wine, spirits, cosmetics, gifts and souvenirs.
Products may sometimes be imported into a free economic zone (or ‘free port’), processed there, then re-exported without being subject to tariffs or duties. According to the 1999 Revised Kyoto Convention, a “‘free zone’ means a part of the territory of a contracting party where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the customs territory”.
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