Tariff Structure in a Small Open Economy: A Theoretical Analysis

Abstract:     
Developing countries have been facing substantial adjustment costs in their endeavor in implementing trade reform. To lessen the adjustment costs of trade reform and to diffuse political support for protection a uniform tariff policy has often been recommended. The present paper examines the efficacy of this policy in terms of a 3-4 specific factor full-employment structure reasonable for a developing economy. It shows that whether a symmetric tariff structure would be able to protect all the import-competing sectors crucially depends on the economy's trade pattern. The paper is then extended to include Harris-Todaro type unemployment of unskilled labour. In this framework also the implications of the uniform tariffs and then welfare effects of tariffs on one sector have been studied. Finally, the consequences of tariffs on urban unemployment of unskilled labour have been examined.

Keywords: Full-employment, specific factor, uniform tariffs, Hechscher-Ohlin subsystem, skilled labour, unskilled labour, urban unemployment

JEL Classification: O10, O41

Accepted Paper Series