Measuring the Cost and Benefits of Import Fees

The negative impact of oil supply shocks has led those countries that are both producers and net importers of crude oil to consider policies that would increase the degree to which such countries are self-sufficient in crude oil. It is understood by all that such self-sufficiency comes at a price. Either internal production must be subsidized or imported crude oil must be taxed, both of which lead to a reduction in welfare. Those arguing in favour of these insulation policies claim that the costs incurred during the periods of supply shocks when a country is at the free market level of self-sufficiency outweigh the welfare cost of whatever programme is required to reduce exposure to external shocks. A prominent policy designed to increase crude oil self-sufficiency is a fee applied to imported crude oil. In this chapter we examine the welfare implications of import fees when used as a device to increase the degree that a country is self-sufficient in any critical raw material. The analysis applies to the current energy debate but its generality extends to any raw material of a country that, at current world prices, is a net importer of that raw material.