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 tradin g partner switches from a specific tariff to an ad valorem tariff that yiel ds the same revenue at the initial trade point, the former country has an i ncentive to lower its tariff. When two identical countries choose the types acid magnitudes of tariffs in a two-stage game, they will choose ad valore m tariffs, making the trade war less severe. (C) 2000 Elsevier Science B.V. All rights reserved.