Which of the following types of tariff is meant to discourage the import of particular products?

2.1.1 GATT Article II and the Tariff Bindings

Unbound tariffs are unconstrained, and members may raise them on an MFN basis. Bound tariffs, by contrast, must respect the negotiated binding, which amounts to a ceiling on the permissible tariff rate [which may be expressed as a percentage of the value of a good (ad valorem tariff) or a specific amount per unit of the good (specific tariff)]. Members are free to charge any tariff below the negotiated binding, and often do. Tariffs that are set below their bound rate are said to generate “binding overhang.”

The commitment to respect tariff bindings is contained in Article II of GATT, which obliges members to charge tariffs “no less favorable” than the bound rates recorded in each member's tariff schedule. The schedules for each member are auxiliary documents that memorialize the negotiated tariff commitments by each member from the inception of GATT to date. Article II makes reference to Parts I and II of the schedules. Part I contains the basic tariff bindings that must be respected for imports from all WTO members. Part II contains certain preferential rates that were allowed to persist at the founding of GATT, largely at the insistence of the British Commonwealth members. Preferential tariff rates in the modern era are often the product of RTAs noted earlier. RTA preferences are not reflected in Article II schedules, but instead in national tariff schedules and in legal instruments associated with particular RTAs.

The new realities of cross-border M&A deals

The global environment for cross-border M&A transactions is likely to become less favorable. The number of such deals could slow as tariffs cause global trade growth and in turn economic growth to slow (or contract). Why? Financial capital flows (including M&As) are highly correlated with trade flows, with capital flowing to those countries exhibiting the most attractive investment opportunities. If global growth slows, so will international capital flows.

Tariffs promote the inefficient use of resources by discouraging takeovers of less inefficient domestic firms by more efficient foreign firms and impact the types of mergers undertaken.21 Tariffs encourage horizontal mergers (i.e., between competitors) and discourage vertical mergers (i.e., between customers and suppliers). Foreign firms acquire competitors in horizontal mergers in countries protected by tariffs as their products are not subject to tariffs. In contrast, tariffs on imports of raw materials and intermediate products from countries whose exports are subject to tariffs make vertical deals less attractive. Countries that increase the protection of intellectual capital within their borders because of tariffs (or the threat of tariffs) imposed on their exports may become more attractive to foreign investment, including M&As.22

Deals that target countries’ technologically and culturally sensitive industries are likely to become more challenging because countries have become more protective of firms in such industries. In 2019, Germany announced its intention to take equity stakes in “strategically significant” industries to insulate these firms from foreign takeovers. The policy also called for changing national and European antitrust rules to encourage the creation of European “national champions” to compete against US and Chinese multinationals. Similar concerns have been voiced by the French. In 2020, the European Union proposed greater scrutiny of foreign acquirers receiving subsidies from their governments seeking to buy EU businesses, further complicating such deals.

China announced a new growth model in late 2020, citing its main drivers of growth as domestic consumption, markets, and companies. Foreign investment (including M&As) and technologies would play a supporting role. Doing deals in China will require a willingness to cede greater control to the government, which is demanding executives manage their businesses to achieve its goals and is channeling capital to those who comply while starving others.23

Future cross-border deals could be smaller on average than in the past to avoid government scrutiny. Smaller countries may represent more attractive investment opportunities because they are less likely to be involved in geopolitics. As firms alter their supply chains, they are likely to source from several countries to reduce the political, economic, and logistical risks of relying too heavily on a single source. Countries that have been ignored in the past because of a lack of infrastructure and skilled labor must be considered as potential sources of supply. In such instances, acquirers should be prepared to make investments in the local labor force and infrastructure. Finally, the China-initiated Regional Comprehensive Economic Partnership could encourage more takeovers of firms within the trade area to take advantage of lower tariffs.

6.1.1 Chapter 4—Tariff Act of 1930

The Tariff Act of 1930,12 also known as the Smoot-Hawley Tariff Act, was passed in response to the perception that imports from other countries were undercutting domestic sales of U.S. products. To counter the economic depression of the 1930s in the United States, Congress raised U.S. tariffs on foreign products to the highest levels in U.S. history. When other countries responded with their own elevated tariffs, the United States was unable to sell its products abroad. Instead of easing the economic depression, the high tariffs significantly deepened it. Therefore, Congress reversed this policy and lowered the tariffs. That lesson still guides U.S. trade policy today, including the trade of telecommunications equipment services and was clearly evident in the focus of the first six rounds of the General Agreement on Tariffs and Trade (GATT), held between 1947 and 1967. In each case, tariff reduction was the main agenda item of the rounds, directly impacting the price of telecommunications products, services, and technologies.

13.4 Concern with Tariff Aggregation

Protection rates – and many other economic distortions – vary enormously across commodities in almost every country. These variations in rates of tariff protection raise the cost of any given “average” level of protection, since the cost of protection increases with the square of the protection rate. Some degree of aggregation is essential because the available information on the structure of production and consumption is at a higher level of aggregation than information on tariffs and trade. Additional aggregation typically is undertaken to ease computational and reporting constraints for the modeler.

The usual approach to aggregation is to calculate weighted averages of tariffs, using as weights the value of external trade. This atheoretical approach is problematic because, as a protection rate rises, the weight associated with that measure declines – to the point that a tariff that completely blocks trade has the same measured impact as a zero tariff. The Overall Trade Restrictiveness Index approach used by Kee et al. (2009, Equation 16) deals with these problems by adding estimates of own-price elasticities as well as import weights and by taking the square of the tariff to reflect the fact that the costs of a tariff rise with its square. If one makes the assumption that the off-diagonal elements of the matrix of trade elasticities are zero, this results in the following estimating equation:

(13.3)OTRI=[∑misiTi2∑m isi]12,

where mi is the compensated elasticity of import demand for good i, si is the share of the good at world prices and Ti is the tariff on the good.

This approach is unfortunately not suited to the problem of aggregation within a trade model. A fundamental difference between this approach and one suited to aggregation in a general equilibrium model is that different parts of the model require different approaches to aggregation. When aggregating tariffs for use within an expenditure function, and hence the volume of imports which is derived by differentiating this function with respect to prices, tariffs should, intuitively, enter the aggregation function linearly, as noted by Lloyd et al. (2010). By contrast, when aggregating tariffs to assess the impacts of tariff changes on tariff revenues or welfare, the tariff change is likely to enter nonlinearly as in the OTRI defined above. Another concern with the conventional OTRI approach is the assumption that the off-diagonal elasticities of import demand are zero. Since the import demand elasticities underlying this function are compensated, the sum of these cross elasticities is, by homogeneity of degree one in prices, equal and opposite to the own-price elasticity. The fact that the elasticity terms being omitted are equal to and opposite in sign to the terms used in the OTRI raises concerns about the omission of these terms, particularly in countries where the share of trade in GDP is large.

Anderson and Neary (1994) propose a uniform tariff that yields the same welfare as the original differentiated tariff structure. In subsequent work they develop uniform tariff measures that are equivalent in their effects on the value of imports (Anderson and Neary, 1996). The unifying feature of these aggregators is that they return the uniform tariff rate that yields the same value of a specific objective function as the actual, non-uniform tariff structure.

Building on the Anderson–Neary approach, Bach and Martin (2001) proposed an approach to aggregation in the context of structural economic models that mitigates many of the problems resulting from use of atheoretical aggregators – and show that the implications of aggregation could be large for specific countries. Martin et al. (2003) apply this methodology to additional countries and confirm that the impact on the results could be substantial. Manole and Martin (2005) develop the approach further, showing that it should be applied in specific ways, and establish relationships between different tariff indexes. A new aggregation method proposed by Anderson (2009) deals with both the aggregation bias and weighting problems, and maintains global payment balances, allowing it to be applied in global models. Laborde et al. (2011) apply that aggregation approach to an ex ante assessment of global economic reforms, demonstrating that it is feasible and examining some of the key issues involved in applying it in a global general equilibrium model.

The effects of aggregation may also depend upon the nature of the reform considered. If the reform involves widely disparate cuts in protection rates, then it seems likely that the approach used for aggregation will be doubly important. To illustrate this point, we draw on the analysis of Laborde et al. (2012) who examine the impacts of the complex and exception-ridden DDA proposals from December 2008 (WTO, 2008a,b).

In order to understand the logic of the aggregation approach, it is useful to begin with a simple case where there is only one distortion, say an import tariff. The essential difference between the new estimates and traditional trade-weighted averages is that the optimal aggregators take into account the fact that the quantity of a good imported subject to a tariff depends on the level of the tariff, with higher tariff rates resulting in a lower import volume. Including these changes in quantity weights has two important consequences. (i) A tariff reduction of a given size on a particular product has a larger impact on the cost of imports and on partners’ export opportunities in later stages of liberalization, i.e. after the tariff has been reduced substantially and its weight in the expenditure cost index has increased. (ii) The impacts of a tariff cut on tariff revenues may be quite different than would be suggested when using a fixed weight – a difference that is largest in the early stages of liberalization, when tariffs are at their highest levels and increases in import volumes have their largest impact on tariff revenues.

Figure 13.4 helps to understand both of these effects. In this diagram, we consider a single tariff in the absence of any other distortions. This tariff is initially t0 and the initial quantity of imports x0. If we consider a reform that progressively reduces this tariff, the quantity of the good imported rises as we move along the line labeled x. When the tariff reaches zero, the weight on this good in the import-cost index becomes x1 under the optimal expenditure aggregator. When we consider large cuts in tariffs, the difference between a weight of x0 and x1 may have important impacts on the estimated effects of a tariff change on the cost of living or on partners’ market access. If we use the traditional fixed-weight approach, the weight may stay at a very low level, suggesting that even a large tariff change has little impact on the cost of living. This effect is clearly important for reforms that involve large tariff reductions on products whose tariffs are initially very high and hence have very low quantities of imports.

The marginal impact of a tariff decline on tariff revenues may be quite different from that on the cost of imported goods. While x0 gives the marginal impact of a change in the tariff on the cost of imported goods, the impact on tariff revenues depends also on the change in the quantity of the good and on the initial tariff rate on that good. In the diagram, this marginal impact is shown by x0 + t0dx/dt. As the tariff declines further, the marginal effect of a reduction in the tariff on tariff revenues is shown by the dashed line. When the tariff is high, a tariff cut may – as drawn – increase tariff revenues because we start from a point beyond the peak revenues for this tariff.29 As the tariff reduction proceeds, the incremental increases in tariff revenues decline and turn into revenue declines where the dashed line crosses the horizontal axis. After the dashed line crosses the horizontal line corresponding to the initial level of imports, x0, the tariff revenue aggregator shows a larger reduction in tariff revenues than the fixed-weight index, despite allowing for the increases in import volumes associated with tariff declines. The marginal decline in tariff revenues remains below the decline in required expenditure until the tariff reaches zero and the impact of a tariff reduction on tariff revenues is the same as its impact on the cost of the good.

The Anderson–Neary approach to tariff aggregation begins with a representation of the economy provided by the following two equations:

Income–expenditure condition:

(13.4)e(p,u)−r(p,v)−(ep−rp)′(p−pw)−f=0.

Vector of behavioral equations:

(13.5)ep(p,u)−rp(p,v)=m.

In the income–expenditure condition, e is the expenditure required to achieve consumer utility level u at domestic price vector p; r is the revenue function (also named the restricted profit function or GDP function) at domestic prices p attainable with the given resource vector v; ep − rp is the vector of net imports/exports at world prices pw and domestic prices p, so that (ep − rp)′(p − pw) represents net revenue from tariffs and export taxes/subsidies; and f is the net financial inflow from abroad needed to finance the gap between income and expenditure required to achieve utility level u. If f is exogenously determined, then u is endogenous and vice versa. In the behavioral equations, m is a vector of net imports, including non-traded goods (for which m ≡ 0) and supplied and demanded factors.

The balance-of-trade function (Anderson and Neary, 1996) can be derived from Equation (13.4) by reclassifying both the level of utility and f as exogenous, and introducing a new endogenous variable, B, to measure the hypothetical financial inflow required to maintain a specified level of utility, say u0, in the face of an exogenous shock such as a change in the tariff vector, (p − pw), or a change in world prices, pw:

(13.6) B(p,u0)=e(p,u0)−r(p,v)−( ep−rp)(p−pw)−f.

The balance-of-trade function gives us the transfer required to maintain the same level of utility given a change in prices, and is therefore a convenient measure of the compensation required to maintain national welfare at any specified level. Its use can be seen as a generalization of the use of the expenditure function to provide a money measure of the impact on consumers of price changes.

The Anderson–Neary Trade Restrictiveness Index (TRI) is the uniform tariff rate, τB, which satisfies:

(13.7)B(pw(1+τB),u0)=B(p,u0),

where the two price vectors being compared are the original vector of domestic prices associated with the non-uniform tariffs, p, and the vector of prices resulting from multiplying the vector of world prices, pw, by the scalar (1 + τB).

While much better than a weighted average as an indicator of the welfare costs of existing trade distortions, this TRI measure is not suitable as an aggregator for use in a modeling context. For modeling, we need two quite different aggregators – one for the parts of the model that involve only the expenditure function, and the quantities that are derived by differentiating this function with respect to price, and another for the parts of the model involving tariff revenues.

Bach and Martin (2001) solved this problem by using one tariff aggregator, τe, for the expenditure function, as a uniform tariff that returns the same level of expenditure as the domestic prices resulting from the original, heterogeneous tariff vector:

(13.8)e(pw(1+τe),u0)=e(p,u0).

The tariff revenue aggregator for use in replicating the tariff revenues associated with the original, heterogeneous, tariff revenue function is similarly determined as the scalar, τr, that satisfies:

(13.9)tr(pw(1+τr),u0)=rj(p, u0),

where τr is the uniform tariff revenue aggregator and tr is the tariff revenue function.

A similar aggregator function could be used for the revenue function r(p, v). This is generally not necessary in applied work because the data available on the structure of production are typically much more aggregated than those available for traded goods, and export-market distortions are far less widely used than import barriers.

By construction, the correct value of B can be obtained by using the tariff aggregates, τe and τr. This allows the model to be written in terms of aggregate variables that are consistent with the underlying model, rather than with the unmanageable disaggregated tariffs or with ad hoc aggregates such as weighted-average tariffs.

Laborde et al. (2012) use a three-tier strategy to implement this approach in the World Bank’s LINKAGE computable general equilibrium model of the global economy (van der Mensbrugghe, 2005), projected to 2025. They first calculate the tariff aggregators for expenditure and tariff revenues using the MAcMap-HS6 version 2.1 database (Boumellassa et al., 2009) that provides detailed information on bilateral tariffs and trade flows at the HS6 level. The model is modified to make a distinction between aggregate quantities computed at domestic and foreign prices needed for this type of global analysis (Anderson, 2009). For the expenditure aggregators, the popular CES functional form is used to specify the ease of substitution between imported goods within the aggregates. By replacing the disparate tariffs in each group with the uniform tariff on all imported goods in the group that generate the same expenditure as is actually observed, a uniform tariff equivalent for expenditures on imports is obtained. For the tariff revenue aggregators, a trade-weighted average is used, with the quantities of each good adjusting in a manner consistent with the same CES functional form, to obtain the uniform tariff that generates the same tariff revenues.

In implementing this approach in applied modeling, two other levels of aggregation need to be taken into account. The first of these arises from the practical problem that some regions in the global model are aggregates covering more than one economy. The second is the fact that the six-digit products are likely to include varieties supplied by different countries. These challenges are dealt with by using three different levels of nesting in the model. At the highest level of aggregation, where there were multiple importing countries in an importing region, CES preferences are assumed across importing countries with an elasticity of substitution σ0. At the second level of aggregation, CES preferences over the HS6 products within the composite goods appearing in the model are assumed. At this stage, the HS6 products are aggregates over varieties imported from all supplying regions, with elasticity of substitution σ1. At the third level, the Armington approach is used, assuming CES preferences across the six-digit varieties from different exporters. At this stage, an elasticity of substitution of σ2 is used between the products provided by different suppliers.

The relationship between the three levels of product substitution is shown in Figure 13.5. For this analysis, values of three different elasticities of substitution σ0, σ1 and σ2 are needed. The value of σ0 is set at 1 in order to hold constant each importer’s share in the value of imports, primarily for want of better information; σ1 is the elasticity of substitution between imported six-digit products from all sources within a composite good (such as between apples and oranges within a composite of vegetables and fruits) and σ2 is determined by the elasticity of substitution between varieties of six-digit products supplied by different countries/regions. No estimates of exactly σ1 and σ2 are available. However, Hummels and Klenow (2005) consider elasticities of substitution between varieties that are differentiated by HS six-digit product and by country of origin, concluding that these elasticities generally lie between 5 and 10. To the extent that these elasticities reflect the margins of substitution associated with both σ1 and σ2, we might expect them to be greater than our σ1 elasticities of substitution but less than our desired estimates for σ2. The analysis is therefore undertaken using core values of 1, 2 and 5 for those three key elasticities.

A sample of results from the analysis is presented in Table 13.17 for two different global reform scenarios in which reforms are phased in over the projection period to 2025. The first two columns in Table 13.17 present results for the benchmark case of full liberalization of all merchandise trade. The first of these columns presents the results obtained using the standard weighted-average approach to aggregating tariffs; the second presents the results for the same experiment when the aggregation problem is allowed for and quantities are allowed to change in line with an elasticity of substitution of 2. The second group of results refers to the highly disparate set of tariff cuts that would result from implementing the formulas and exceptions inherent in the Doha modalities as proposed in WTO (2008a,b). Within this group of three columns, the key factor of interest is the differences between the weighted-average aggregation approach where the elasticity of substitution is implicitly set to zero (the standard weighted-average approach to aggregating tariffs), and the cases with elasticities of substitution of 2 and 5.

Table 13.17. Impacts on real incomes of full global merchandise trade liberalization and Doha partial liberalization, 2025 (2004 US$ billion per year)

Source: Laborde et al. (2012).

For most countries, moving from the standard trade-weighted averages to optimally-weighted averages results in larger estimated welfare gains because of the improvements in the measurement of the cost of imports, and of tariff revenues. This increase is particularly striking in cases such as China and the US, where significant liberalization is proposed and where market access gains reflect the substantial increases in weights as protection in export markets is reduced. There are, however, some interesting exceptions to this general pattern. Chile is one such example, where there are few additional measured gains using the optimal approach, for two reasons. One is because most of Chile’s applied tariffs are uniform, so liberalizing own tariffs has a relatively uniform effect across products. The other is that Chile has preferential arrangements with many partners, and the aggregation approach reveals a greater sensitivity to preference erosion as the larger weights on imports from trading partners with less preferential access are taken into account. In aggregate, though, the estimated welfare gain to the world as a whole from either total or partial global trade liberalization is far higher when the optimal tariff aggregation procedure is used, and more so the larger is the elasticity of substitution.

2.2.3 Use case “tariff updating”

Regulatory specifications differentiate the following types of tariffs:

TAF 1 is a data-minimizing tariff configuration; only meter readings or sums about energy consumption will be sent to the energy supplier. This tariff is comparable to a manual readout of metering data, such as the state of the praxis in Germany now.

TAF 2 is a time-of-use tariff configuration; the price for the customer depends on configured daytime ranges.

TAF 3 is a load-based tariff configuration; the price depends on the metered loads.

TAF 4 is a consumption-based tariff configuration; the price depends on consumed energy in a specific time range, for example, the price may significantly increase if the customer uses more energy in a month than contracted.

TAF 5 is an event-based tariff configuration; the price depends on external events. The supplier may send external events by using the CLS communication channel to the SMGW.

TAF 7 is based on the metered load profile data; different than other tariffs, suppliers calculate energy quantities for various tariff stages in their data centers. In TAF 1 to TAF 5, these calculations are done by SMGWs.

There are some other auxiliary TAF options in SMGW without relevance to price calculations for the customers.

Tariff data

For about 1700 tariff lines, Russia employs a “mixed system” in which the maximum of the ad valorem or specific tariff applies. Due to the acquisition of trade flow data at the tariff line level, the actual tariffs were first calculated precisely by Shepotylo and Tarr (2008), and employed in Russian WTO accession analysis by Rutherford and Tarr (2008, 2010). The tariff rates for the analysis in this section were based on trade flow data at a slightly aggregated level and were therefore not precise. Shepotylo and Tarr have shown, however, that the tariff calculations used in this paper are not subject to significant errors.

Based on a mapping (of the Russian Statistical Office) from the tariff line data of the Customs Committee to the sectors in our input-output table, we calculated a weighted average tariff rate for the sectors of our model. We calculated these rates two ways: based on all imports (where the collected tariff rate as a percentage of all imports is 8.1%) and on non-CIS (Commonwealth of Independent States) imports (where the collected tariffs as a percentage of non-CIS imports is 11.1%). The rates we employ in the model are the rates based on all imports. The rates based on all imports are lower since the base on the calculation includes CIS imports on which no tariffs are imposed. We believe collected tariff rates more closely approximate the protection a sector receives and the incentives it faces. Similar procedures are applied for export taxes. The results at the sector level are in Table 6.3.

Applying these tariff rates across all sectors implies that tariff revenue in our model is about 1.6% of GDP in the initial equilibrium. Collected tariffs in Russia are closer to 1.1% of GDP.28 There are several reasons that the collected tariffs in Russia are less than the legal rates on most favored nation (MFN) imports. Most notably, exemptions to the Russian tariff are available for regional agreements (most notably the CIS), personal imports and shuttle trade. We adjust for the CIS trade, so we are applying the MFN rates on all imports from the non-CIS. This slightly, but not significantly biases upward the rates we employ relative to collected rates.

8.5.1 Pipeline Economics

Tariffs for pipelines will need to be sufficient to recover costs and provide a return on capital. Pipeline tariffs are normally expressed on a monetary amount per unit of volume transported. The initial pipeline investment cost will have a significant impact on user tariffs and is influenced by a number of factors.

Size of the pipeline: Pipelines benefit from economies of scale and hence building the largest pipeline possible is usually the most appropriate strategy although building over-sized pipes can result in stranded capacity if demand or supply is insufficient.

Gas or liquid: Whether a pipeline is for gas or liquid transportation is an important consideration. Gas pipelines normally operate at higher pressures meaning more expensive fabrication costs and the additional need for compression equipment.

Location: Offshore pipelines require specialist pipe-lay equipment, sea bed survey and so on. This adds to the cost of development. Onshore pipelines may pass through difficult terrain, such as mountains. Other considerations, which add to the investment cost, include location in seismic zones or the need to pass through environmentally sensitive areas.

The following example illustrates the importance of capital cost on the level of pipeline tariff. A 10 bcm natural gas pipeline is assumed to cost US$ 5 billion together with other assumptions detailed in Table 8.1.

Table 8.1. Pipeline Tariff Calculation

To cover operating costs and earn a satisfactory return to investors, the pipeline users would have to pay a tariff of at least US$ 2.05 per mmBtu. It can be seen from this calculation that the largest component of the tariff relates to capital costs (representing approximately 78% of the annual pipeline cost). Pipeline tariffs are hence usually most sensitive to the assumptions regarding the annualisation of capital cost assumptions. If, for instance, a 15% return on investment is required then the tariff increases to US$ 949 million per annum or US$ 2.64 per mmBtu representing a 30% increase.

Tariffs

A carrier's tariff is more than just a price list. It contains detailed descriptions of each service offered, complete with technical specifications, product guarantees, and quality of service parameters. It also details the respective obligations of the carrier and the customer and the resolution procedures to be used when problems arise. As such, it is a written contract between the telecommunications provider and its customers.

While the 1996 Act explicitly removed rate-of-return regulation, many states still require carriers doing business in their states to file tariffs. Unlike in the previous regulated environment, the states do not hold rate hearings to approve or deny the tariffs, but many require companies to file tariffs in order to have a publicly available, written statement from each carrier outlining its obligations and agreements with its customers. Some states require all companies, both incumbent local exchange carriers and competitive local exchange carriers, to file tariffs, and other states require only the incumbent local exchange carriers to file tariffs.

The impact of protectionism on M&As

Government policies that restrict imports (or promote exports) for the benefit of a domestic economy are called protectionist. Examples include tariffs, nontariff barriers, quotas, and subsidies. See Chapter 19 for a more detailed discussion of this topic.

A tariff is a tax intended to protect domestic jobs from foreign competition, shelter emerging industries, promote national security, or retaliate against foreign protectionist practices. So-called nontariff barriers include import licensing; packaging and labeling requirements; and plant, food, and animal inspections. Other examples include local content requirements, anti-dumping laws, and environmental impact restrictions that serve to increase the cost of imported products.57 Whereas a tariff is a tax levied on imported products, quotas limit the amount of a good that can be imported. Subsidies are benefits granted to a business by the government in the form of a cash payment, tax deduction, or some other tax incentive to boost a nation’s exports.58

Protectionism in its various forms promotes the inefficient use of resources by discouraging takeovers of inefficient domestic firms by more efficient foreign firms and impacts the types of mergers undertaken.59 Tariffs can encourage cross-border horizontal mergers (i.e., between competitors) and discourage vertical mergers (i.e., between customers and suppliers). Foreign firms are inclined to acquire competitors in countries protected by tariffs as their products are not subject to tariff barriers. In contrast, tariffs on imports of raw materials and intermediate products from countries whose exports are subject to tariffs make cross-border vertical deals less attractive.

Analysis of demand–supply relations of the trade and tariff

A tariff can raise commodity prices, reduce consumption and imports, and enhance domestic production. The impact of a quota is the same as that of a tariff in nature. A prohibitive quota (prohibiting all imports) is equivalent to a prohibitive tariff.

Though there is no fundamental distinction between tariff and quota, subtle differences exist. Tariffs can raise public revenues or make it possible to reduce some other taxes, which can make up for the losses that consumers of importing countries suffer. However, profits made through price variance resulting from the quota go to importers or exporters who are lucky enough to get the import permit.

Tariffs result in economic inefficiency. The economic losses of consumers surpass the total of the public revenues and the extra profits the manufacturers make in the process of imposing tariffs.

Tariff collection can:

encourage domestic production of low efficiency

raise prices so consumers’ purchasing taxed commodities is not efficient

increase public revenues.

The first two add to economic costs because they are inefficient.

Under the guidance of Ricardo’s comparative advantage theory, free trade benefits consumers of the trading countries. Then why does every country want to set up international trade barriers? Economic theorists put forward these reasons for economic protection:

the non-economic view – to sacrifice some economic welfare to support other aims of the country

misunderstanding economic logic

Analyses based on market power (the consumption attracting power of consumers) or the faultiness of the macro economy.