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Are Uniform Tariffs Optimal?

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  • Mary Amiti

Abstract

This paper analyzes whether uniform tariffs give rise to the highest welfare compared with tariffs that either escalate or de-escalate along the value chain of production. We show that countries may be better off with de-escalating tariffs where tariff rates are higher on intermediate inputs and lower on final goods. The key point is that higher tariffs can encourage agglomeration of intermediate input suppliers and final goods producers in one country. With high tariffs on intermediate inputs, the benefits of close proximity to final goods producers may outweigh the benefits of locating according to comparative advantage, which is more likely when the share of intermediate inputs in producing final goods is high. De-escalating tariffs yield the highest welfare when the benefits of agglomeration are very high. These benefits of agglomeration accrue to both countries in the form of lower prices.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/72.

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Length: 19
Date of creation: 01 Apr 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/72

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Keywords: Tariff structures; Economic models; final goods; intermediate inputs; tariff rates; trade costs; uniform tariffs; trade liberalization; elasticity of substitution; tariff rate; manufacturing sector; tariff reform; factor markets; free entry; manufactured goods; average tariff; market access effect; high tariffs; average tariff rate; factor endowments; reducing tariffs; international trade; political economy; imported intermediate; zero profits; manufacturing industries; manufacturing industry; imperfect competition; zero tariff; effects of trade liberalization; factors of production; low trade; tariff reductions; market equilibrium; constant elasticity of substitution; aggregate demand; foreign trade; tariff revenue; trade effects; intermediate goods; domestic demand; market access issues; integrated market; aggregate consumption; tariff structure; production costs; import tariffs; terms of trade; tariff-inclusive price; terms of trade effects; import intermediates; economic integration; low tariffs; raw materials;

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References

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  1. Avinash K. Dixit & Gene M. Grossman, 1981. "Trade and Protection with Multistage Production," NBER Working Papers 0794, National Bureau of Economic Research, Inc.
  2. Arvind Panagariya & Dani Rodrik, 1991. "Political-Economy Arguments for a Uniform Tariff," NBER Working Papers 3661, National Bureau of Economic Research, Inc.
  3. Lopez, Ramon & Panagariya, Arvind, 1992. "On the Theory of Piecemeal Tariff Reform: The Case of Pure Imported Intermediate Inputs," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 615-25, June.
  4. Lloyd, P. J., 1974. "A more general theory of price distortions in open economies," Journal of International Economics, Elsevier, Elsevier, vol. 4(4), pages 365-386, November.
  5. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 64, University of Warwick, Department of Economics.
  6. Falvey, Rodney E., 1988. "Tariffs, quotas and piecemeal policy reform," Journal of International Economics, Elsevier, Elsevier, vol. 25(1-2), pages 177-183, August.
  7. Krugman, Paul, 1991. "History versus Expectations," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(2), pages 651-67, May.
  8. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262561476, December.
  9. Michalopoulos, Constantine, 1999. "Trade policy and market access issues for developing countries : implications for the Millennium Round," Policy Research Working Paper Series 2214, The World Bank.
  10. Bertrand, Trent J & Vanek, Jaroslav, 1971. "The Theory of Tariffs, Taxes, and Subsidies: Some Aspects of the Second Best," American Economic Review, American Economic Association, American Economic Association, vol. 61(5), pages 925-31, December.
  11. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, American Economic Association, vol. 72(3), pages 389-405, June.
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Cited by:
  1. Florian A. Alburo Author-X-Name-Florian, 2010. "The Development Impact of Information Technology in Trade Facilitation," Working Papers, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada. 7810, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada..

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