Tariff De-escalation with successive oligopoly: Implications for developing country market access

Анотація

In this paper, we focus on the idea that firms are concerned about their relative profitability in a vertically-related market. This draws upon the literature on cascading protection, whereby increases in upstream tariffs may have a spillover effect on downstream firms’ profits, thereby increasing the chance of tariffs downstream, e.g., Sleuwagen et al. (1998). The key result we present here is that simultaneous and equal reduction of upstream and downstream tariffs has non-equivalent effects on upstream and downstream firms’ profits. This result is due to the within stage and between stage impact of tariff cuts, where the latter is comprised of pass-through and pass-back effects. This outcome provides a potential source of opposition to any tariff reductions, generating a strong argument for tariff de-escalation, and thereby rationalizing formula approaches to tariff reductions in trade negotiations (Francois and Martin, 2003). This also has important implications for market access, tariff escalation being highlighted as a key issue affecting developing country exports (World Bank, 2003).

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