A proposal for the reduction of domestic price variability during the phase-in period of trade liberalization

Countries replacing existing trade barriers with a fixed tariff may find that domestic price variability rises to politically unacceptable levels. This paper shows how the tariff-reduction formula can be modified to delay the transmission of world price variability. The importance of this modification is demonstrated by a simple two-country, one-commodity simulation model. The simulation results show that tariffication of existing EC variable leviesjexport subsidies would dramatically increase price variability within the European Community and that the transmission of this variability can be delayed by slightly altering the adjustment formula.