Non-Equivalent Ad Valorem Equivalents and Gravity

Specific tariffs are more commonly applied in agriculture than in the rest of the economy. We argue that the volatility of agricultural commodity markets is a contributing factor by showing that higher expected welfare can be achieved with the optimal specific tariff than with its ad valorem counterpart in the presence of volatile market conditions in the exporting countries. Contrary to popular wisdom, more volatility does not warrant higher tariffs unless the distribution of the foreign autarky price is negatively skewed. For arbitrary specific tariffs, the transformation into ad valorem equivalents may decrease or increase the volume of trade and the world price. We also show that countries with more restrictive specific tariffs are less likely to pursue tariff simplification. We estimate a gravity model about beef trade and find that specific tariffs have a small reducing effect, beyond the effect stemming from their ad valorem equivalent rate.