Practitioners of tariff reforms have been recommending tariff reforms toward uniformity since they fear that divergences among tariff rates cause price distortions among imports. On the other hand, the optimal tax theorists have been insisting that the revenue-constrained optimum tariff structure must be non-uniform. The present paper formalizes practitioner's hunch within the framework of the optimum tax theory. Using this formulation, the paper observes that the uniform tariff structure must be a good approximation of the revenue-constrained optimum tariff structure as long as substitutability among commodities is dominant.

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This paper addresses the issue of revenue constrained partial tariff reform. We derive instructive formulae clarifying the optimal structure of revenue raising tariffs. We demonstrate the importance of net import demand elasticities and complementarity with untaxed export goods. We further analyze the empirically important case of revenue raising tariffs in the presence of distortionary producer taxes. These are shown to modify the optimal tariff structure in an intuitive manner. We then conduct numerical experiments with an eleven sector general equilibrium model of Cameroon. We calculate optimal revenue constrained tariffs and compare them with the uniform rate that generates the same revenue. In addition, we calculate the social cost of changing individual tariff rates. Our major conclusion is that replacing the existing tariff structure with a uniform rate can lead to significant welfare losses as long as the other taxes in the economy remain suboptimal. If, however, the rest of the taxes are set optimally, then a uniform tariff rate is very close to the optimum, even in a revenue-constrained economy. We also find that changes in individual tariff rates can have very different implications for social welfare-in sign as well as in magnitude-when compared to complete tariff reform.

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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.

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The optimal design of tariff policies is considered in a simple general-equilibrium model that reflects many of the real-world constraints placed on tariff design and reform. Sufficient conditions for an uniform tariff structure to be optimal are deduced, these involve quasi-separability of the trade-expenditure function. A number of partial tariff-reform measures are considered. Determining the appropriate direction that tariff reform should take depends critically upon the marginal effect raising or lowering a tariff has on the production of importables and exportables.

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This paper lays out an analytical framework which is general enough to encompass two prominent approaches to trade policy analysis in developing countries. These are (1) the Ramsey-Samuelson-Diamond-Mirrlees public finance tradition as applied to open economies and (2) the effective protection tradition stemming from the work of Balassa and Corden. Such a unified perspective emphasizes the critical role of assumptions about domestic fiscal instruments in the appropriateness of trade policy advice. The paper obtains analytical characterizations of desirable protective and revenue-raising trade taxes in various circumstances and, inter alia, identifies directions of reform. The quantitative significance of these ideas is illustrated by calculating such tariffs in a general equilibrium model of the Indian economy.

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