The combination of weakening oil prices and the failure of Congress to deal with the budget...

 

 

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The combination of weakening oil prices and the failure of Congress to deal with the budget deficit by cutting spending led some to see the possibility of achieving two objectives at once: (1) protecting U.S. oil producers from "cheap" foreign competition and (2) reducing the budget deficit. The solution was an oil-import fee or tariff. A tax on imported crude and refined products that matched a world oil-price decline, for example, would leave oil and refined- product prices in the United States unchanged. Thus, it was argued, such a tax would have little effect on U.S. economic activity. It merely represents a transfer of funds from foreign oil producers to the U.S. Treasury. Moreover, it would provide some price relief to struggling U.S. refineries and encourage the production of U.S. oil. Finally, at the current level of imports, a $5/barrel tariff on foreign crude oil and a separate tariff of $10/barrel-equivalent on refined products would raise more than $11.5 billion a year. QUESTIONS 1. Suppose the tariff were levied solely on imported crude. In an integrated world econ- omy, who will bear the burden of the import tariff? Who will benefit? Why? What will be the longer-term consequences? 2. If a $10/barrel tariff were levied on imported refined products (but no tariff were levied on crude oil), who would bear the burden of such a tariff? Who would benefit? Why? What would be the longer-term consequences? The combination of weakening oil prices and the failure of Congress to deal with the budget deficit by cutting spending led some to see the possibility of achieving two objectives at once: (1) protecting U.S. oil producers from "cheap" foreign competition and (2) reducing the budget deficit. The solution was an oil-import fee or tariff. A tax on imported crude and refined products that matched a world oil-price decline, for example, would leave oil and refined- product prices in the United States unchanged. Thus, it was argued, such a tax would have little effect on U.S. economic activity. It merely represents a transfer of funds from foreign oil producers to the U.S. Treasury. Moreover, it would provide some price relief to struggling U.S. refineries and encourage the production of U.S. oil. Finally, at the current level of imports, a $5/barrel tariff on foreign crude oil and a separate tariff of $10/barrel-equivalent on refined products would raise more than $11.5 billion a year. QUESTIONS 1. Suppose the tariff were levied solely on imported crude. In an integrated world econ- omy, who will bear the burden of the import tariff? Who will benefit? Why? What will be the longer-term consequences? 2. If a $10/barrel tariff were levied on imported refined products (but no tariff were levied on crude oil), who would bear the burden of such a tariff? Who would benefit? Why? What would be the longer-term consequences?

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If the tariff were levied solely on imported crude oil in an integrated world economy the burden of the import tariff would likely be borne by the con... View the full answer