Tariffication and Welfare in a Differentiated Duopoly

Converting non‐tariff barriers such as quotas into tariffs has been referred to as tariffication and is one of the most important outcomes of the Uruguay Round. Due to the burgeoning trend of free trade agreements around the world, tariffication has also been popular among Asian economies. By utilising a duopoly model with heterogeneous products, this paper compares the efficiency of three tariffication schemes: a quota is converted into an import‐volume‐equivalent tariff, import‐price‐equivalent tariff or profit‐equivalent tariff. It is found that tariffication always increases the world welfare no matter which equivalent tariff is adopted by the domestic government. This result echoes the spirit of tariffication proposed by the WTO and explains why more and more countries are using tariffs instead of nontariff barriers. If we further assume that the quota rent equals the tariff revenue, the domestic welfare will also increase after tariffication. By contrast, the domestic firm’s profit can be higher or lower after tariffication, depending on the tariffication schemes. Finally, the foreign firm is always worse off.