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Tariff index theory

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  • Anderson, James E.

Abstract

For a single tariff, the height of the tariff is an unambiguous measure of the policy's restrictiveness. With more than one tariff, theory has not provided an extension that captures the idea of the tariff's height, so analysts have used index numbers such as the mean and the coefficient of variation (standard deviation divided by the mean) of tariffs. By contrast, the theoretical literature on the piecemeal reform of tariffs shows that efficiency gains from tariff reform depend on complex conditions that have little relation to the mean or variance of tariffs. But in the absence of a connection between theory and empirical measures, it is difficult to know whether to discard the measures. Moreover, the piecemeal reform question of measuring the welfare gain from a tariff is not directly related to the problem of evaluating the height of restrictiveness. The problem of finding a single number analogous to the height of tariffs is the tariff index number problem. The authors have developed a solution: the Trade Restrictiveness Index, which they define as the uniform tariff factor that is equivalent in trade restrictiveness (equivalent in the balance of trade) to the actual differentiated tariff structure. Here, the author develops the Trade Restrictiveness Index in terms of mean and variance-covariance indexes of the tariff schedule. There are two payoffs. First, the Trade Restrictiveness Index can be decomposed into expressions that rescue the commonsense idea that lower mean and lower variance of tariffs are both efficient. Second, a special case is offered in which the proper weights in the mean and variance of tariffs are the observed trade weights. Thus, the Trade Restrictiveness Index is superior to traditional summary measures such as the average tariff rate and the coefficient variation for the tariff schedule. It requires only limited additional information on the structure of the economy to yield a measure that is preferable on both theoretical and practical grounds.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1023.

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Date of creation: 30 Nov 1992
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Handle: RePEc:wbk:wbrwps:1023

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Keywords: Environmental Economics&Policies; Export Competitiveness; Trade Policy; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Economic Theory&Research;

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  1. J Anderson & J.P. Neary, 1993. "A New Approach to Evaluating Trade Policy," CEP Discussion Papers dp0173, Centre for Economic Performance, LSE.
  2. 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.
  3. Hatta, Tatsuo, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(1), pages 1-21, February.
  4. 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.
  5. Anderson, James E. & Bannister, Geoffrey, 1992. "The trade restrictiveness index : an application to Mexican agriculture," Policy Research Working Paper Series 874, The World Bank.
  6. Fukushima, Takashi, 1979. "Tariff Structure, Nontraded Goods and Theory of Piecemeal Policy Recommendations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 427-35, June.
  7. Anderson, James E & Neary, J Peter, 1992. "Trade Reform with Quotas, Partial Rent Retention, and Tariffs," Econometrica, Econometric Society, Econometric Society, vol. 60(1), pages 57-76, January.
  8. Hatta, Tatsuo, 1977. "A Recommendation for a Better Tariff Structure," Econometrica, Econometric Society, Econometric Society, vol. 45(8), pages 1859-69, November.
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