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Welfare Effects of Tariff Reduction Formulas

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Author Info
Jan Guldager Jorgensen (University of Southern Denmark)
Philipp J.H. Schröder (Aarhus School of Business)

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Abstract

WTO negotiations rely on tariff reduction formulas. It has been argued that formula approaches are of increasing importance in trade talks, because of the large number of countries involved, the wider dispersion in initial tariffs (e.g. tariff peaks) and gaps between bound and applied tariff rates. This paper resents a two country intra-industry trade model with heterogeneous firms subject to high and low tariffs. We examine the welfare effects of applying three different tariff reduction formulas proposed in the literature i) a proportional cut, ii) the Swiss formula and iii) a compression formula. No single formula dominates for all conditions. The ranking of the three tools depends on the degree of product differentiation in the industry, and the achieved reduction in the average tariff.

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Publisher Info
Paper provided by EconWPA in its series International Trade with number 0506006.

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Length: 20 pages
Date of creation: 30 Jun 2005
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Handle: RePEc:wpa:wuwpit:0506006

Note: Type of Document - pdf; pages: 20
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Web page: http://129.3.20.41

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Related research
Keywords: Welfare; monopolistic competition; intra-industry trade; wto trade liberalization; formula approaches;

Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
F15 - International Economics - - Trade - - - Economic Integration

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References listed on IDEAS
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  1. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December. [Downloadable!] (restricted)
  2. Schmitt, Nicolas & Yu, Zhihao, 2001. "Economies of scale and the volume of intra-industry trade," Economics Letters, Elsevier, vol. 74(1), pages 127-132, December. [Downloadable!] (restricted)
  3. Francois, Joseph & Martin, Will, 2003. "Formula Approaches for Market Access Negotiations," CEPR Discussion Papers 3720, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Lockwood, Ben & Wong, Kar-yiu, 2000. "Specific and ad valorem tariffs are not equivalent in trade wars," Journal of International Economics, Elsevier, vol. 52(1), pages 183-195, October. [Downloadable!] (restricted)
    Other versions:
  5. Jan Jørgensen & Philipp Schröder, 2005. "Welfare-ranking ad valorem and specific tariffs under monopolistic competition," Canadian Journal of Economics, Canadian Economics Association, vol. 38(1), pages 228-241, February. [Downloadable!] (restricted)
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