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Abstract

Tariff escalation becomes one of the major issues in the new Doha Round negotiation because it is viewed as a stumbling block to the industrialization development for the developing countries. When tariffs on products escalate with the stage of processing, the effective rate of protection, or the tariff expressed as fractions of value-added after deducting intermediate inputs from product value, also increases. Thus, tariff escalation potentially signals high rates of protection for value-added or processed products, and can inhibit international trade in these goods. The major purpose of this study is to examine the degrees of tariff escalations in Taiwan's agriculture -related commodities and the economic consequences to reduce them. A simplified theoretical model is first established to illustrate the structural impacts and welfare implications of reducing tariff escalation. Then a computable general equilibrium (CGE) model of Taiwan is applied to simulate the economy-wide impacts of three alternative reduction proposals. The model distinguishes 160 sectors, 6 types of labor, 8 types of margins and 160 commodities compiled from the Input-Output tables of 2004. Simulation results indicate that if welfare improvement is the major policy concern, then Taiwan should favor the reduction because it improves the overall welfare of Taiwan. However, if farmers' welfare is the major policy concern, then Taiwan should act against the reduction. In case the consensus to reduce tariff escalations has been determined, then the second-best choice would be to offer upstream industries relatively smaller tariff reduction rates than the downstream industries.

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