Tariff Structure and Import Policy

Abstract

This paper develops a simple model to investigate tariff structure and import policy. It shows that to maximize welfare the importing country has an incentive to impose a higher tariff on the final good than on the intermediate input. Such a tariff structure has been termed "tariff escalation." Furthermore, this paper shows that the import policy chosen by the importing country depends on its policy goal. Specifically, this paper shows that an import policy allowing both intermediate inputs and final goods to be traded will maximize the welfare levels of the importing and exporting countries. This result provides a theoretical explanation for the popularity of trade patterns in which both intermediate input and final good are traded internationally.