How to estimate the impact of tax barriers among countries

Although it is difficult to estimate the impact of tax barriers among countries, there are straightforward ways in which import tax affects the supply and demand of products in a large economy country. There are reactions to consumerism due to price changes, the issue of domestic market share, and the government’s willingness to generate more revenue might discourage consumerism of certain products, or for national security purposes. Different countries react differently to import taxes (Tokarick, 2004). For instance, large economy countries tend to place import tax on raw materials on manufactured goods to protect local producers of such goods from low prices due to foreign surplus. Figure 1 below exemplifies the effects of an import tax on a large home economy:

The introduction of an import tax will reduce the foreign surplus goods available to its consumers, increasing the price of import-taxed products. The producers of a similar product enjoy a high price and an increased market share in the domestic market in return, leading to an increase in local suppliers’ output. The result is increased local employment and net profits from locally existing and possibly new firms from newly attracted and interested investors.
However, the large home country may face both negative and positive effects of import tax. For instance, China’s General Administration of Customs and State Taxation Administration chose to waive duty on imported semiconductor raw materials and parts until 2030, even after its effort to boost local chip-making companies’ self-reliance. According to Pan (2021), the country’s Integrated Circuit (I.C.) makers rely heavily on foreign technologies. Hence, local firms’ dependence on Germanium and Lithium was not sustainably available to its big technological industry. The cause was the high prices that few mining companies charged on the natural products since foreign suppliers could barely access the market. Thus, China government’s strategy is to create more local jobs and increase revenue by levying import duties on foreign chip-making materials.
Positively, China’s government may have generated import-tax income that it might have used to support its many spending programs that helped its many citizens, such as the programs for the unique and vulnerable groups. That means citizens of such a country can enjoy the benefits of raised national welfare because of the revenue generated from import taxes. Still, the strategy can make its finished chip exports expensive to its own -and foreign consumers- reducing their welfare.

Effects of an Import Quota on a Large Home EconomyIt is common for countries to initiate import quotas based on the financial value and quantity or even quality of goods they are ready to import. For example, the United States is legendary for issuing quotas on general agricultural products like meat, sugar, and dairy products. In such a country, the quota limits consumer surplus resulting in increased domestic prices for local and imported produce. The outcome is that consumers’ welfare is reduced, but they are also subject to an assortment of inferior quality products from their own country due to decreased competition. Figure 2 below shows the impact of an import quota on a large home economy:

High prices also affect the well-being of consumers when exporters retaliate when a large home economy quota affects their products, as happened in March 2001 when the U.S. issued quotas for hot rolled steel from all countries except Mexico, Canada, Israel, and Jordan. The quota barriers were for a noble cause since the U.S. wanted to protect its domestic producers, but the government disregarded that hot rolled steel was only one type of alloy. Downstream industries that use the metal were heavily affected by price increases of up to 5% by December 2002, meaning the end consumers could not match up to the end products that which cost equipment and vehicle producers $3.61 billion within the year’s trading period as Hergt (2020) explains.
A large economy government stands to gain if it instigates minor restrictions on imports. A controlled quota means that imports check the local producers’ surplus. Thus consumers can comfortably buy the products resulting in increased revenue from local products and imports. A controlled quota also ensures a limited amount of substandard, counterfeit, or dangerous imports. There may also be an increase in local firms due to the import quotas when local investors are interested in the market because of improved prices and less cheap imports, which translates to the creation of employment and hence more purchasing power for its citizens and more revenue (Todorova & Kalchev, 2015).
However, a too limiting quota only benefits the local producers ‘surplus while limiting consumers’ surplus increases the national welfare. Although consumers may lose, the gains from quotas exceed the losses across the economy, which means that compensation from winners improves the economic welfare distribution.


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