Specific and Ad Valorem Tariffs are not Equivalent in Trade Wars*
Paper number: 96/02
Paper date: February 1996
Paper Category: Discussion Paper
University of Exeter
University of Washington
This note argues that when two countries choose optimal tariffs in a trade war, specific tariffs are not equivalent to ad valorem tariffs even if all markets are competitive. In particular, it shows that if a country's trading partner switches from a specific tariff to an ad valorem tariff that yields the same revenue at the initial trade point, the former country has an incentive to lower its tariff. When both countries choose the types and magnitudes of tariffs in a two-stage game, they will choose ad valorem tariffs, making the trade war less severe.
First Version: August 1995
This Version: February 1996
JEL Classification Nos: F11, F13
Keywords: Equivalence between Specific and Ad Valorem Tariffs, Trade War
**Professor Ben Lockwood, Department of Economics, University of Exeter, Amory Building, Rennes Drive, Exeter, EX4 4RJ, Great Britain, tel: (44) 1392-263219, fax: (44) 1392 263242, email: B.Lockwood@exeter.ac.uk
***Kar-yiu-Wong, Department of Economics, University of Washington, Seattle, WA 98195-3330. Phone: 206-685-1859. E-Mail: firstname.lastname@example.org
*This paper was written while both authors were visiting the Economic Policy Research Unit (EPRU), Copenhagen Business School. We would like to thank the faculty and staff at the EPRU for their hospitality.