How should tariffs be structured?
In the course of trade-policy reforms, countries must confront at least two important questions with respect to tariffs. First, what is the optimal structure of tariffs? In particular, is it optimal to tax all imports at a uniform rate? Second, should intermediate inputs be subject to import duties and if so is there a role for duty drawbacks on exports? This paper seeks to answer these important questions based on intuitive arguments, supported by literature and simple diagrams. The author argues that the introduction of tariffs on intermediate inputs complemented by duty drawbacks is welfare-improving. He further argues that if the objective is to protect the import-competing sector, uniform tariffs will minimize the distortion in production but not in consumption. If the objective is revenue, uniform tariffs will in general fail to minimize distortion in either production or consumption. The existence of smuggling, imperfect competition, and economies of scale weaken the case for uniform tariffs. The principal justification for uniform tariffs is their transparency, administrative simplicity, and relatively low level of unproductive profit-seeking activities. The author concludes that considerations of efficiency conflict with considerations of political economy. Ultimately the issue calls for more systematic empirical study.
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