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Welfare Effects of Tariff Reduction Formulas

  • Jan Guldager Jørgensen
  • Philipp J.H. Schröder

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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File URL: http://hdl.handle.net/10.1111/j.1467-9396.2011.00973.x
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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 19 (2011)
Issue (Month): 4 (09)
Pages: 664-673

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Handle: RePEc:bla:reviec:v:19:y:2011:i:4:p:664-673
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  1. Joseph Francois & Will Martin, 2002. "Formula Approaches for Market Access Negotiations," Tinbergen Institute Discussion Papers 02-125/2, Tinbergen Institute.
  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. Daniel Gros, 1987. "Protectionism in a Framework with Intra-Industry Trade: Tariffs, Quotas, Retaliation, and Welfare Losses (Le protectionnisme dans un cadre faisant intervenir les échanges de produits analogues: droit," IMF Staff Papers, Palgrave Macmillan, vol. 34(1), pages 86-114, March.
  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. 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.
  6. 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.
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