Falling Tariff Rates

Graph showing falling import tariff rates in the US.

US-import-Tariff-Rates

US International Trade Commission USITC

Figures for 2011 includes estimates for tariff rates up to 2011.

The key part of this years report is the fact that import tariff barriers have fallen considerably, meaning potential welfare gains of reducing import tariffs have fallen. US has one of lowest tariff rates, but some other countries are even lower. (Global tariff rates)

The biggest tariffs remain in dairy products, Tuna, tobacco and ethanol.

Note, this concentrates on import tariffs. The theory of comparative advantage states that a country will see an increase in economic welfare if import tariffs are reduced – even if other countries don’t reduce their tariffs. See: Trade Creation for diagram showing net welfare gain from tariff reduction.

However, if there is a reciprocal reduction in tariffs (i.e. other countries drop their tariffs), domestic exporters will also see an increase in economic welfare. This would cause an even bigger increase in economic welfare.

Why are Tariffs Falling?

  • Progress made by WTO in organising tariff reductions.
  • Greater acceptance of benefits from free trade.
  • Increased globalisation has diminished strength of protectionist sentiments.

Consequences of Falling Tariff Rates on Global Supply Chains

As well as lower prices and increased consumer welfare, falling tariff rates have played a role in hastening the process of globalisation. Increasingly, goods are no longer produced in one country, but we are seeing the emergence of global supply chains, with imported raw materials and parts to assemble finished goods.

Between 1980 and 2006, there was a 400% increase in the value of US manufacturer’s total input costs, imported from abroad.

To give a well known example of a global supply chain

  • e.g. Apple designed in California, built in China.
  • Ford cars may have tyres produced in Indonesia, and engines produced in Europe

It is isn’t just falling tariffs which have contributed to global supply chains, but also:

  • improved technology
  • Improved efficiency of transport
  • Improved cross border co-operation, e.g. standardisation of legal property rights

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