If the world price of steel is $500 a ton a specific tariff of $50 is equivalent to an ad valorem tariff of
|a. 5 percent|
b. 10 percent
c. 15 percent
d. 20 percent
The Correct Answer Is:
- b. 10 percent
The correct answer is indeed option (b) 10 percent. To understand why this is the correct choice, it’s essential to delve into the concepts of specific tariffs and ad valorem tariffs, and how they are calculated.
A specific tariff is a type of trade tariff imposed by governments, which charges a fixed amount of money for each unit of a particular imported good, irrespective of its price. In this case, we are dealing with steel, and the specific tariff is $50 per ton of steel. This means that for every ton of steel imported into the country, a fee of $50 is levied, regardless of whether the steel is expensive or relatively cheap.
Ad Valorem Tariff:
Conversely, an ad valorem tariff is calculated as a percentage of the value of the imported goods. Rather than imposing a fixed fee per unit, it’s based on a proportion of the product’s price. In the context of steel, an ad valorem tariff would be applied as a percentage of the steel’s market price.
Now, let’s calculate the ad valorem equivalent tariff rate for the specific tariff:
Ad Valorem Equivalent Tariff (%) = (Specific Tariff / World Price of the Good) * 100
Here’s how it’s calculated:
- Specific Tariff: $50 per ton
- World Price of Steel: $500 per ton
Ad Valorem Equivalent Tariff (%) = (50 / 500) * 100 = (1/10) * 100 = 10%
So, the ad valorem equivalent tariff rate for a specific tariff of $50 on a world price of steel at $500 per ton is 10 percent, which is why option (b) is the correct answer.
Now, let’s explore why the other options are not correct:
a. 5 percent:
This is not the correct answer because the ad valorem equivalent tariff rate is 10 percent, as calculated earlier. A specific tariff of $50 on a $500-per-ton steel product equates to a 10 percent ad valorem tariff, not 5 percent. A 5 percent tariff would be lower than the actual impact of the specific tariff in this scenario.
c. 15 percent:
This option is not correct because it overestimates the ad valorem equivalent tariff rate. The accurate ad valorem equivalent tariff rate, as we calculated, is 10 percent.
A 15 percent ad valorem tariff would imply a higher tariff rate than the one established by the specific tariff. It’s important to note that specific tariffs tend to result in higher ad valorem equivalent rates when the price of the imported good is relatively low.
d. 20 percent:
This option is also not correct because it overestimates the ad valorem equivalent tariff rate. As we’ve calculated, the accurate ad valorem equivalent tariff rate is 10 percent. A 20 percent ad valorem tariff would imply an even higher tariff rate, which is not consistent with the actual impact of the specific tariff.
Understanding the nuances of specific and ad valorem tariffs is vital in international trade. Specific tariffs can disproportionately affect the cost of cheaper imports, while ad valorem tariffs are proportional to the value of the goods.
In this case, it’s clear that the specific tariff of $50 per ton on steel, when compared to the world price of $500 per ton, results in an ad valorem equivalent tariff rate of 10 percent, making option (b) the correct answer.