Country A decides to introduce a tariff on all import of manufactured goods. Illustrate and explain the derivation of this country’s import demand curve. Why should the foreign price of these manufatured goods be affected, if at all, by Country A’s actions?
“A tariff is a tax or duty levied on the traded commodity as it crosses a national boundary.” (Salvatore, 2012,p.113)1.There are three kinds of tariff that a country can levy on imported goods namely specific, ad valorem and compound tariff. Specific tariff refers to a fixed amount of tariff per unit, ad valorem tariff is expressed as a percentage of the value of the commodity whereas compound tariff is mix of both.
Price
Price
Country A Supply
P1
P2
P3
World Supply
Q4
Q3
t
P
Country A Import Demand Curve
Q2
Q1
Country A Demand
Q* Quantity Quantity
Above is the import demand curve of country A
At price level P1, the quantity exchanged is Q* i.e. there are no imports in the country as the country’s demand and supply are equal. If P3 is the price of all imported goods then Q1 is the quantity supplied by Country A producers whereas Q2 is the quantity demanded. The quantity of goods imported by Country A in this case will be Q2-Q1. If tariff is levied by the importing country then the world supply curve will be pushed upwards. The new price of the imported goods will be P2 which will be less than the increase in tariff. The quantity demanded at this price level will be Q4 and the quantity supplied will be Q3. The goods imported will be Q4-Q3. The dotted green lines that denote the imports are plotted on the second graph to derive the import demand curve.(Krugman, P.R. and Obstfeld, M, 2014)2
Let us now discuss the impact on the foreign price of these manufactured goods by imposition of tariff by country A, (say A henceforth) on all its imports. When country A imposes tariff or import duty on all its imports, imported goods will become expensive in the importing country. If domestic goods can be substituted for the imported goods, that is they are homogenous goods, then the demand for imported goods will go down, inducing a rise in demand for domestically produced goods as they become relatively cheaper now. Increased demand for domestic goods will give opportunity to producers in domestic market to raise price for its goods.
Price
Country A Supply
P1
P2
P3
Q4
Q3
Q2
Q1
Country A Demand
Q* Quantity
Now supposing that A has monopsony power in trade, implying that it is a large importer of foreign goods, then its reduced demand for foreign goods will have a huge impact in the demand supply curve of the exporting countries, say B, for sake of convenience hence for...
