This paper analyzes whether uniform tariffs give rise to the highest welfare compared with tariffs that either escalate or de-escalate along the value chain of production. We show that countries may be better off with de-escalating tariffs where tariff rates are higher on intermediate inputs and lower on final goods. The key point is that higher tariffs can encourage agglomeration of intermediate input suppliers and final goods producers in one country. With high tariffs on intermediate inputs, the benefits of close proximity to final goods producers may outweigh the benefits of locating according to comparative advantage, which is more likely when the share of intermediate inputs in producing final goods is high. De-escalating tariffs yield the highest welfare when the benefits of agglomeration are very high. These benefits of agglomeration accrue to both countries in the form of lower prices.
This paper reviews economic developments in Venezuela during 1995–97. The overall public sector balance shifted from a deficit of 7 percent of GDP in 1995 to a surplus of 7¼ percent of GDP in 1996. This massive swing was owing to a major increase in the underlying oil surplus, a decline in the non-oil underlying deficit, and the fact that virtually no financial assistance was provided to the banking system, compared with the cumulative 16½ percent of GDP provided in 1994–95 in the context of the banking crisis.