Tariff Escalation and Invasive Species Risk

equivalently both factors from τI, τIFG to τNN and τNNG, respectively such that —NNG-<-— . This
τ_Iτ_I

implies that the final-processed tariff is reduced faster than the raw-input tariff is. Figure 2
illustrates the joint tariff reduction case with two policy shocks, i.e., both tariff factors fall. The
processor supply DFG^s shifts moderately to the right as the input becomes cheaper., Her/his
derived demand DI^d shifts much to the left as output price falls significantly with the reduction in
escalation. Supply D^s shifts to the right as the externality decreases when input imports decrease.

This type of joint reduction menu is consistent with the spirit of tariff reforms the World
Trade Organization (WTO) has put in place with the Uruguay Round Agreement on Agriculture
(WTO [1994]). The Doha agreement is also likely to continue this approach (WTO [2004]). All
tariffs will eventually fall but the highest tariffs fall faster than the moderate ones. This approach
raises some issues: how fast should the tariff on the processed final good fall relative to the fall
of the tariff on the raw input; and what supply and demand conditions would insure that such a
reduction of escalation through joint tariff reduction would increase welfare without
exacerbating the externality in the raw input market.

To derive sufficient conditions for welfare-improving joint tariff reduction, we consider
change in deadweight loss before and after reforms and then the IS externality. There are three
components of deadweight loss in the model: the deadweight loss associated with D supply, the
deadweight loss associated with DI demand (or DFG supply), and the deadweight loss associated
with FG demand. Since D and FG depend on one policy only, deadweight loss associated with
either D or FG decreases when their respective tariff factors fall. The deadweight loss associated
with DI (or equivalently DFG by integrability) could produce a second best situation in which a
reduction in one tariff could exacerbate the distortion created by the other. Focusing on DI,

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