Tariff Escalation and Vertical Market Structure

• Author: Shih‐Jye Wu,Hong Hwang,Chao‐Cheng Mai
• DOI: http://doi.org/10.1111/twec.12414
• Published date: 01 August 2017
• Date: 01 August 2017

Tariff Escalation and Vertical Market

Structure

Hong Hwang

1

, Chao-Cheng Mai

2,3

and Shih-Jye Wu

4

1

Department of Economics, National Taiwan University, Taipei, Taiwan,

2

Department of Industrial

Economics, Tamkang University, Tamsui, Taiwan,

3

Research Center for Humanities and Social Sciences,

Academia Sinica, Taipei, Taiwan and

4

Department of Political Economy, National Sun Yat-Sen

University, Kaoshung, Taiwan

1. INTRODUCTION

IT is well recognised that a tariff structure involving vertically related products is one of the

most controversial issues between developed and developing countries engaging in multilat-

eral negotiations.

1

Many empirical studies have shown the prevalence of tariff escalation in the

world, which is def‌ined as tariff rates for f‌inal goods being higher than those for intermediate

inputs and the latter being higher than those for raw materials. Although it is true that tariff

rates fell signif‌icantly in the aftermath of several rounds of the General Agreement on Tariffs

and Trade (GATT) trade negotiations, tariff escalation is nevertheless still prevalent. To exam-

ine how much tariffs have actually escalated, the escalation rates of some of the developed

countries, both pre- and post-Uruguay Round, are shown in Table 1. As this table indicates,

tariff escalation in industrial products is signif‌icant both before and after the Uruguay Round.

It is worth pointing out that tariff escalation is most signif‌icant in Asian economies.

Safadi and Yeats (1993) examined the tariff structure of Asian countries and found that

most Asian countries’ tariffs prevailed more escalation than those in Western industrial

countries. Even today, this tariff escalation phenomenon still prevails in Asian countries, in

particular for agricultural goods. For example, Table 2 (adopted from Narayanan and

Khorana, 2014, Table 2) provides the range of post-Uruguay Round tariffs on cotton and

coffee processing chains in selected Asian countries. It reveals that tariff escalation in both

the agricultural goods is prevalent in much the same way as that in industrial products

reported in Table 1.

2,3

Furthermore, Nassar et al. (2007) found that nominal protection

We are very grateful to two anonymous referees for their useful comments.

1

For example, World Bank (2003) acknowledged that, within market access negotiation, tariff structure

towards the vertically related industries is considered a critical element of the development dimension of

the Doha Round. In particular, the problem of tariff escalation, which involves an increasing pattern in

tariff structure along value chains, has been recognised as an important form of protection that impedes

developing countries efforts to move resources from primary goods to value-added production and

exports.

2

Many empirical studies on tariff structures, such as Elamin and Khaira (2004), Boumellassa et al.

(2009) and Narayanan and Khorana (2014), have found that tariff escalation is common over agricultural

products in less-developed and developed countries.

3

Tariff structure in coffee processing chains points to another argument made to explain tariff escala-

tion. The geographical distribution of coffee production is determined entirely by climate. Consequently,

few importers in the Western world have a domestic coffee growing industry to protect. But they do

have processors and the old-fashioned story for tariff escalation, to raise effective rates of protection for

downstream processors, f‌its the coffee story pretty well. We are indebted to an anonymous referee for

pointing out this example.

©2016 John Wiley & Sons Ltd 1597

The World Economy (2017)

doi: 10.1111/twec.12414

The World Economy

escalates with the degree of processing for both industrial and agricultural goods in develop-

ing and developed countries.

The end result is that such escalating tariffs shift economic activities of exporting countries

away from processing, towards primary production, thus distorting the eff‌icient distribution of

primary production and processing. Much attention in the literature since then has been direc-

ted at examining the resource allocation between importing and exporting countries and their

resultant welfare levels.

4

Unfortunately, to the best of our knowledge, there is a continuing

absence of strong explanations for the causes of tariff escalation.

TABLE 1

Tariff escalation of developed countries: pre- and post-Uruguay Round

Industrial Products (Excluding Petroleum)

Pre-Uruguay Round Tariffs Post-Uruguay Round Tariffs

Raw materials 2.1 0.66

Semi-processed 5.4 3.93

Finished 9.1 4.44

Source: Adopted from GATT (1994, table II.5) and Nassar et al. 2007, table 20.3).

TABLE 2

Comparison of Asian Countries Tariffs on Primary and Final Stages for Cotton and Coffee Processing

Chains

Raw Cotton Cotton Textile

Products

Raw Coffee Coffee

Products

China 4.29 7.24 4.42 11.8

India 11.07 16.47 35.68 39.76

Indonesia 0.02 6.43 0.96 4.1

Japan 0 3.68 0 3.94

Korea 0.08 6.51 5.31 29.91

Thailand 0.04 5.63 2.52 14.91

Turkey 0 2.93 12.38 18.04

Vietnam 0 30.29 1.49 13.76

Source: Narayanan and Khorana (2014, table 2).

4

For example, Golub and Finger (1979) investigated the impacts of escalating tariffs on the industrial

structure of exporting and importing countries. They pointed out that it should be possible to simultane-

ously reduce developing countries’ export taxes on primary goods and developed countries’ import tar-

iffs on processed goods in such a way that processing will expand in the developing countries but not

contract in the developed countries. As a result, liberalising tariff escalation leads to an improvement in

world welfare. Yeats (1984) showed that escalating tariffs may distort resource allocation. To evaluate

this, one must check not only the effective protection rate but also the import demand elasticity of

goods. Laird and Yeats (1987) examined the structure of developing country tariffs on key primary and

processed commodities and showed that these nations’ tariffs are generally set at higher levels and incor-

porate a greater degree of escalation than import tariffs in developed countries.

©2016 John Wiley & Sons Ltd

1598 H. HWANG, C.-C. MAI AND S.-J. WU