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Input tariffs and duty drawbacks in the design of tariff reform

Author

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  • Panagariya, Arvind

Abstract

This paper analyzes the welfare effects of raising tariffs on inputs, complemented by duty drawbacks on exports, in a small open economy. The main findings of the paper are as follows. First, a tariff on the input unaccompanied by duty drawbacks on exports works like a production tax at different rates on goods using the input. The effect of such a tariff on welfare is ambiguous in general even if the tariffs on final imports are lowered so as to maintain a constant revenue. Second, a tariff on the input accompanied by a duty drawback on exports is equivalent to a production tax on the final import and a consumption tax on the export using the input. A small change of this type improves welfare unambigously provided the export and import goods using the input are substitutes in both production and consumption. This result holds even if the policy change leads to a contraction of exportables not using the input. Finally, the effect of a large tariff on the input accompanied by a duty drawback on exports is ambiguous in general but a presumption can be established in favor of a favorable effect. The last two results are reinforced by the presence of a revenue constraint.

Suggested Citation

  • Panagariya, Arvind, 1990. "Input tariffs and duty drawbacks in the design of tariff reform," Policy Research Working Paper Series 336, The World Bank.
  • Handle: RePEc:wbk:wbrwps:336
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    References listed on IDEAS

    as
    1. 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, vol. 61(5), pages 925-931, December.
    2. V. K. Ramaswami & T. N. Srinivasan, 1968. "Optimal Subsidies and Taxes When Some Factors Are Traded," Journal of Political Economy, University of Chicago Press, vol. 76, pages 569-569.
    3. Boadway, R. & Maital, S. & Prachowny, M., 1973. "Optimal tariffs, optimal taxes and public goods," Journal of Public Economics, Elsevier, vol. 2(4), pages 391-403.
    4. Dasgupta, Partha S & Stiglitz, Joseph E, 1974. "Benefit-Cost Analysis and Trade Policies," Journal of Political Economy, University of Chicago Press, pages 1-33.
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    Cited by:

    1. Cadot, Olivier & de Melo, Jaime & Olarreaga, Marcelo, 2000. "The Protectionist Bias of Duty Drawbacks and the New Regionalism," CEPR Discussion Papers 2559, C.E.P.R. Discussion Papers.
    2. Cadot, Olivier*de Melo, Jaime*Olarreaga, Marcelo, 2001. "Can duty-drawbacks have a protectionist bias? Evidence from MERCOSUR," Policy Research Working Paper Series 2523, The World Bank.

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