Tariffs and the Most Favoured Nation principle
Tariffs are taxes imposed at the border on imports. They generally vary according to the type of product, as reflected in the importing country’s tariff schedule. Tariffs were first instituted in order to raise revenue for government, but with the invention of the income tax, tariffs became a much less important source of revenue in developed countries.
The burden of a tariff will fall on the domestic consumer of the goods, except to the extent that the elasticities of demand or market power of the importing country cause the foreign producer to bear some of the costs of the tariff. Tariffs generally help competing domestic producers, by reducing price competition from imports and therefore allowing them to raise their prices or increase their sales. Consumers who remain in the market will pay more for the goods than they otherwise would, and some consumers will be priced out of the market (often referred to as a dead-weight social cost). Consumers in importing countries lose more than producers in these countries gain (by virtue of this dead-weight social cost), thus reducing domestic welfare. Adverse impacts on foreign exporters of these goods also make the tariff globally welfare-reducing. Importantly, with the growing complexity of supply chains, tariffs on raw materials, intermediate products, and capital equipment impose higher costs on manufacturers of products that incorporate those inputs, rendering them less competitive both domestically and internationally.
The welfare effects of a tariff need to be considered relative to other protectionist instruments...
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