Question

Evaluate the following statement: “the tariff imposed by a large country brings a net gain to the whole world.” Need answer in 200-250 words.  

Answer 1

The given statement is False.

An import tariff lowers consumer surplus (increasing producer surplus) in the importing country and raises consumer surplus (lowering producer surplus) in the exporting country. The national welfare effect of an import tariff is the sum of producer and consumer surplus, government revenue effects and deadweight losses. National welfare of importing nation may rise or fall when a large country implements an import tariff, depending on the quantum of tariff. It rises when the quantum is less and vice versa.On the other hand, national welfare in the exporting country always falls when an importing country implements an import tariff.

The effect on world welfare is the sum of national welfare effects on the importing and exporting countries which is impacted by the importer’s production distortion, the importer’s consumption distortion , the exporter’s consumption distortion, and the exporter’s production distortion. Since each of these is negative (emperically and otherwise), the world welfare effect of the import tariff is negative. On a net basis, for the countries involved, the sum of the losses exceeds the sum of the gains.

An import tariff, irrespective of the size, reduces international production and consumption efficiency causing global welfare to fall.