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Asymmetric Tariff Pass-Through to Trade Prices

Discussion Papers

No.631

February 2017

ABSTRACT

This paper examines asymmetry in tariff pass-through, that is, how import prices react differently to the increase and decrease in most favored nation (MFN) rates. For this, we analyze Indonesia’s imports because Indonesia not only reduced MFN rates for a significant number of products but also raised those rates for a large number of other products in 2010. The analysis results indicate asymmetric tariff pass-through: trade prices decrease when MFN rates decline but do not change when these rates rise. Furthermore, examining the effects of changes in MFN rates on product quality and quality-adjusted prices separately, we find that a decrease in trade prices when MFN rates decline is led by a reduction in (average) product quality. In addition, we find that controlling for the change in ad valorem equivalent rates, a change in tariffs from ad valorem form to specific form does not have any additional impact on import prices.

Keywords: Tariff pass-through; Trade prices
JEL classification: F15, F53


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