Abstract

This paper considers the effects of tariffication-conversion of a variable import levy, widely used in the European Community, into an equivalent ad valorem tariff on trade and welfare. While tough negotiations lie ahead over the exact rates of tariff reduction, contracting countries in principle agreed to tariffication proposed by the United States. If producers are risk neutral, tariffication has no effect on production and trade, and gains from a GATT agreement in the Uruguay Round depend on the extent of tariff reductions. If domestic producers are risk averse, however, tariffication reduces domestic production of the importable and thus has a trade expansion effect, which causes a shift in the import demand curve. This trade expansion effect may dominate the increased trade effect resulting from a negotiated tariff reduction, which causes a movement along the import demand curve. Consumers benefit from tariffication but domestic producers lose because of an increased risk premium.