1 RATIONAL DELAYS IN TARIFF REDUCTION PROGRAMMES: INSIGHTS FOR TRADE POLICY FROM CORE ECONOMIC MODELS

This paper is an attempt to shed light on a tricky issue in trade policy: whether pre-announced reductions in trade barriers should ever be suspended or reversed. The model invokes the micro-economic assumptions of imperfect competition and product differentiation with differential investment responses aligned to the tariff-reduction scenarios of delay and ongoing reduction. The criterion equation shows whether any induced investment benefit does or does not compensate for the alternative-policy loss of welfare arising from delaying the benefits to consumers from the earlier reduction in tariffs under the reduction strategy. We also show the degree of investment-induced cost reduction that is required to justify delaying the program of tariff reduction. The model provides the framework for these issues to be tackled and for trial or actual numbers to offer quantitative answers. Subject to a sufficient investment-induced cost reduction, the case remains open for delays in pre-announced tariff reduction programs to be policy optimal. Moreover, this case does not depend on adjustment delays and burdens. In many ways we have developed a more strictly economic, rather than political or reactions-based, set of circumstances that may justify the delay. The message here is not that delays in tariff reduction programs are, in general, justified. It is that a set of questions can be developed that open up this possibility. The questions are specific and demanding. Unless the welfare gains from cost reductions induced by the business investment are sufficient, and unless the business investment would not have arisen without the incentive effects of the tariff delay, the case is not made out