The instruments

The Instruments
of Trade Policy

A tariff, the simplest of trade policies, is a tax levied when a good is imported. Specific tariffs
are levied as a fixed charge for each unit of goods imported(for example, $3 per barrel
of oil). Ad valorem tariffs are taxes that are levied as a fraction of the value of the imported
goods (for example, a 25 percent U.S. tariff on imported trucks). Ineither case the
effect of the tariff is to raise the cost of shipping goods to a country.
Tariffs are the oldest form of trade policy and have traditionally been used as a source of
government income.Until the introduction of the income tax, for instance, the U.S. government
raised most of its revenue from tariffs. Their true purpose, however, has usually
been not only to provide revenue but toprotect particular domestic sectors. In the early
nineteenth century the United Kingdom used tariffs (the famous Corn Laws) to protect
its agriculture from import competition. In the late nineteenthcentury both Germany and
the United States protected their new industrial sectors by imposing tariffs on imports of
manufactured goods. The importance of tariffs has declined in modern times,because
modern governments usually prefer to protect domestic industries through a variety of
nontariff barriers, such as import quotas (limitations on the quantity of imports) and
export restraints(limitations on the quantity of exports—usually imposed by the exporting country at the importing country's request). Nonetheless, an understanding of the effects
of a tariff remains a vital basis forunderstanding other trade policies.
In developing the theory of trade in Chapters 2 through 7 we adopted a general equilibrium
perspective. That is, we were keenly aware that events in one part of theeconomy have
repercussions elsewhere. However, in many (though not all) cases trade policies toward one
sector can be reasonably well understood without going into detail about the repercussions...