An Evaluation of Ad Valorem Equivalent Tariffs: Evidence from a Partial Equilibrium Model

Economists often replace specific tariffs with their ad valorem equivalents, or AVEs, when calibrating models. However, the computation of AVEs under a counterfactual tariff schedule is impossible without assuming that unit prices do not change, and this assumption results in misleading estimates if unit prices do change. In this paper, I set up a partial equilibrium trade model that is able to include both specific and ad valorem tariffs; I then compute counterfactual equilibria both with specific rates from the data and the AVEs of those rates, and the difference between these estimates provides an indicator of AVEs’ reliability as a measure. I perform this analysis under two counterfactual scenarios: one in with all specific tariffs increase by ten percent and one in which twenty percent of imports become subject to column 2 tariffs instead of the lower permanent normal trade relations (PNTR) tariffs. Results indicate very little difference between import quantity estimates computed with specific rates and estimates computed with AVEs, suggesting that AVEs are a reliable substitute for specific tariff rates when doing economic modeling.