Why do tariffs increase domestic producer surplus but decrease domestic consumer surplus?

Effects of tariffs pdf

A long-standing challenge to the global economy is the possibility that some countries compete for export markets through artificially low prices. Political leaders and pundits sometimes propose import tariffs to counteract these supposed price advantages, and exert pressure on other countries to change their policies. But proponents of such measures often fail to realize that such tariff policies, in addition to actually hurting those they are aimed at, can also have a high cost internally.    What is surprising is that this self-inflicted harm can be considerable, even if trading partners do not retaliate by imposing tariffs of their own.

Figure 1 below shows two scenarios, one in which East Asian emerging market countries do not retaliate by imposing their own tariffs on U.S. imports (green line), and one in which they do (red line). In both scenarios, real GDP falls and, as Mundell predicted, the dollar appreciates. As expected, the output of East Asian countries (not shown) declines. If retaliatory action is taken, the dollar appreciates to a lesser extent, but US GDP falls much more. In addition, real investment plummets (not shown), due to both the decline in U.S. activity and higher prices for intermediate imports from East Asia used to produce investment goods.

Which generates an increase in tariffs

We welcome the decision to accelerate the reduction of tariffs on capital goods for industry. Hopefully, a program of gradual tariff reduction for the rest of the capital goods and inputs will be proposed as a complement. Although there are fiscal restrictions to make a more aggressive reform, the more we move forward, the better prepared we will be to integrate into the world. The total cost, in the case of capital goods, could be around US$200 million, but sooner or later it will have to be done. It also brings us up to date with the National Agreement, which set 2004 as the target date for this measure.

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Consumption effect of a tariff

The exchange rate is one of the most analyzed and discussed macroeconomic variables among financial experts due to its great importance, not only in the valuation of investment portfolios but also in the impact it has on the different macro indicators.

Most countries lack the resources to produce everything by themselves, so they depend on foreign trade to buy what they lack and sell the surplus they produce. Many economies import more goods and services than they export, which generates a trade deficit, but if exports are higher, the country has a trade surplus.

According to INEGI figures, Mexico reported a trade surplus of 5.82 billion dollars in 2019, a 2.3% rebound in its exports and with a 1.9% drop in its purchases from abroad.

Most countries have their own currency and exchange it for foreign currency to buy foreign products. When they sell exports, they exchange payments made in foreign currency for domestic money.

How tariffs affect imports

In this article we address the relationship between international trade and endogenous pollution with a mechanism in which trade policy provides the national government with a credible warning that influences the strategic behavior of firms to adopt cleaner technologies. The government has a greater incentive to protect a clean industry than to protect a highly polluting one. In that sense, a locally polluted open economy with an imperfectly competitive market structure will tend to lower pollutant emissions to a greater extent than under an autarkic regime. A commitment to free trade would be counterproductive: it would eliminate the government’s ability to credibly threaten lower levels of protection. We show that any trade liberalization could decrease the country’s welfare.

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In this paper we address the relationship between trade and endogenous pollution levels with a mechanism where trade policy provides the home government with a credible threat that influences firm’s strategic behavior to adopt cleaner technologies. The government has a greater incentive to protect a clean industry than to protect a very polluting one. In that sense a locally polluted open economy with an imperfectly competitive market structure is likely to reduce pollution emissions more than under an autarkic regime. A commitment to free trade would be counter-productive: it would remove the government’s ability to credibly threaten lower levels of protection. We show that any trade liberalisation could decrease the home country’s welfare.

Why do tariffs increase domestic producer surplus but decrease domestic consumer surplus?
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