Welfare Effects of Tariff Reduction Formulas

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 rat...

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Bibliographic Details
Published in:Review of international economics 2011-09, Vol.19 (4), p.664-673
Main Authors: Jørgensen, Jan Guldager, Schröder, Philipp J.H.
Format: Article
Language:English
Subjects:
Economic models
GATT
Product differentiation
Studies
Tariff reductions
Tariffs
Welfare
World Trade Organization
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Summary: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.
ISSN:0965-7576
1467-9396
DOI:10.1111/j.1467-9396.2011.00973.x