WHY AND WHY NOT OF UNIFORM TARIFFS

Abstract

This paper offers an intuitive but rigorous analysis of the uniform-tariff issue under a variety of circumstances, Among the areas covered are the role of the policy objective, importance of imported inputs and the relevance of political-economy considerations. The main conclusions of the paper maybe summarized as follows. Assuming fixed endowments and no domestic taxes, optimum tariffs for raising a fixed revenue are nonuniform. In this setting, revenue-neutral trade taxes include tariffs and subsidies on intermediate inputs. Broadly speaking, tariffs on intermediate inputs combined with duty drawbacks on exports are welfare improving both with and without revenue constraint. As a general rule, a policy change that causes the output to fall and consumption to rise in the protected sector is welfare improving. An important conclusion of the paper is that the conventional efficiency criteria point towards nonuniformity in tariffs while transparency, administrative convenience and political economy considerations point in the opposite direction. A compromise solution favored in the paper is the use of a limited number of tariff rates, say three, to exploit efficiency gains from differential tariffs without sacrificing too much on other objectives such as administrative simplicity and minimization of directly unproductive profitseeking activities.