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Welfare Effects of Tariff Reduction Formulas

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  • Jan Guldager Jorgensen

    (University of Southern Denmark)

  • Philipp J.H. Schröder

    (Aarhus School of Business)

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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Bibliographic 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
Date of revision:
Handle: RePEc:wpa:wuwpit:0506006

Note: Type of Document - pdf; pages: 20
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Web page: http://128.118.178.162

Related research

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

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  1. Francois, Joseph & Martin, Will, 2003. "Formula Approaches for Market Access Negotiations," CEPR Discussion Papers 3720, C.E.P.R. Discussion Papers.
  2. Kar-yiu Wong & Ben Lockwood, 1997. "Specific and Ad Valorem Tariffs are not Equivalent in Trade Wars," Discussion Papers in Economics at the University of Washington 0081, Department of Economics at the University of Washington.
  3. 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.
  4. 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.
  5. Joseph Francois & Will Martin, 2002. "Formula Approaches for Market Access Negotiations," Tinbergen Institute Discussion Papers 02-125/2, Tinbergen Institute.
  6. 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.
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