Specific and ad valorem tariffs: are not equivalent in trade wars

This note argues that when two countries choose optimal tariffs in a trade war, specific tariffs are not equivalent to ad valorem tariffs even if all markets are competitive. In particular, it shows that if a country's trading partner switches from a specific tariff to an ad valorem tariff that yields the same revenue at the initial trade point, the former country has an incentive to lower its tariff. When two identical countries choose the types acid magnitudes of tariffs in a two-stage game, they will choose ad valorem tariffs, making the trade war less severe. (C) 2000 Elsevier Science B.V. All rights reserved.