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Welfare Effects of Tariff Reduction Formulas
Author(s) -
Jørgensen Jan Guldager,
Schröder Philipp J.H.
Publication year - 2011
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2011.00973.x
Subject(s) - tariff , economics , international economics , ranking (information retrieval) , negotiation , intra industry trade , welfare , product differentiation , reduction (mathematics) , commercial policy , product (mathematics) , free trade , international trade , trade barrier , mathematics , computer science , market economy , geometry , machine learning , political science , law
World Trade Organization (WTO) negotiations rely on tariff reduction formulas. 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 presents 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 discussed in the literature that were used and proposed in previous and current General Agreement on Tariffs and Trade (GATT)/WTO negotiations (1) a proportional cut, (2) the Swiss formula and (3) a tiered 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.