imports. Similarly invasive foreign insects in raw wood products such as the Asian longhorned
beetle can be eliminated in final goods since finish milling and kiln drying will kill most wood
organisms when done properly.
We investigate the conjecture that many OECD countries could reduce or rebalance their
trade of primary products (agricultural commodities, wood) by reducing tariffs on processed
food and value-added wood products. The composition of their imports would change and the
share of processed goods in imports would rise. Two welfare gains ensue. The first one is an
allocative gain in markets. The second one refers to the reduction of IS hazard and associated
externalities. We formalize this conjecture and establish conditions under which it arises, and
operationalize and translate these conditions into practical policy guidance. Our specific
objectives are to identify policy setting and reforms under which win-win situations arise
(reduced trade distortions, reduced hazard and externalities).
The following sections first discuss the evidence on tariff escalation, on IS and associated
costs. Then we analytically formalize the conditions under which win-win outcomes arise, and
finally we provide conclusions and policy implications.
2. Evidence on Tariff Escalation and IS
2.1. Tariff escalation
The economic literature has long established the existence of tariff escalation in the protection
structure of commodity and processed product markets. Protection escalates with the level of
processing, in almost all countries and across many products. This escalation hinders the
exporter’s diversification into value-added and processed products.
There is a well-established older literature on tariff escalation from the late 1970s with
the work of Yeats, Finger, and associates (Golub and Finger; Laird and Yeats; and Yeats). Tariff