Trade Policy Under Perfect Competition

ECON 171 · Spring 2026 · Week 5

Sasha Petrov

Today’s Agenda

  1. Tariffs: specific and ad valorem
  2. Welfare effects of a tariff in a small country
  3. Terms-of-trade effect in a large country
  4. Import quotas and quota rents
  5. Export subsidies
  6. Comparing policy instruments

What We Aim to Learn

Motivation: why study tariffs now?

  • After four decades of falling tariffs under the WTO, US policy reversed sharply in 2018.
  • 2018–19 US-China trade war: 25% duties on ~$350 B of bilateral trade.
  • 2018 Section 232: 25% on steel, 10% on aluminum.
  • 2025 “reciprocal” tariffs: Yale Budget Lab estimates the US average effective tariff rate is at its highest level since the 1930s.
  • This week’s question: who actually bears the cost of a tariff, and by how much?

Weighted-mean applied tariff rate, 1988–2022. Source: World Bank WDI via Our World in Data. 2023+ US surge not yet in the series.

What are tariffs?

Specific vs. ad valorem tariffs

  • Specific: rate \(s\) in $/unit (e.g., $0.063/L on still wine). Duty \(= s \cdot M\).
  • Ad valorem: rate \(t\) on declared value (e.g., 25% on light trucks). Duty \(= t \cdot p^{*} \cdot M\).
  • Compound: both at once (common for dairy and other agriculture).
  • Each line is filed in ACE on CBP Form 7501 with HTS code, value, and rate.

Excerpt of a real CBP Form 7501 entry summary, with boxes 32 (Entered Value), 33 (HTSUS Rate), and 34 (Duty) highlighted.

25% \(\times\) $700 \(=\) $175    ⟸ ad valorem \(t \cdot p^{*} \cdot M\)

Real 2015 entry at the Port of Tacoma. HTSUS heading 8704.31 (small light trucks) carries the 25% “chicken tax” — LBJ’s 1964 retaliation against EU duties on US frozen chicken. Source: drift-and-drive.com. For a specific duty, Box 33A would read e.g. $0.063/L and would multiply Box 31 (quantity) instead.

What’s on a complete Form 7501?

Fully completed CBP Form 7501 Entry Summary, page 1, with every block filled in for a sample import.

  • Header (1–24): filer/entry codes, port codes, country of origin, manufacturer ID, dates.
  • Parties (25–26): ultimate consignee (where goods go) and importer of record (legally liable for duty).
  • Line items (27–34): HTS code, value, rate, duty — one row per commodity.
  • Totals (35–40): $3,870 entered value × 25% = $967.50 duty, plus $31.67 MPF = $999.17 owed.
  • Filer (41–43): a licensed broker signs and certifies on the importer’s behalf in ACE.

Training sample (filer Awesome Brokers LLC, consignee Awesome Corp, Austin TX): transmission shaft, HTSUS 8483.10.5000, UK origin, American Airlines airfreight. Source: importsacademy.com.

How does a tariff affect a small country?

Price and quantity effects of a tariff

\(a\) = PS gain · \(b, d\) = DWL · \(c\) = tariff revenue · \(a+b+c+d\) = CS loss

  • Tariff \(t\): Foreign exporters now receive only (domestic price \(-\,t\)) per unit sold to Home
  • At the old world price \(p^{*}\), Foreign would net \(p^{*}\!-\!t < p^{*}\). Too low — Foreign refuses; \(X_F\) collapses to zero
  • A shortage opens at \(p^{*}\): the full free-trade import volume goes unfilled
  • Price bids up to clear the shortage. Domestic producers expand along \(S_H\); consumers contract along \(D_H\)
  • At \(p^{*}+t\) Foreign re-enters (nets \(p^{*}\) again). Imports settle at the smaller \(Q_D^{t}-Q_S^{t}\)

Producer surplus on the PPF

Left: partial-eq Home market with \(S_H\) + Foreign export supply \(X_F\). Right: PPF + welfare gauge. Both react to the same tariff slider.