Welfare Effect of Tariffication on Parallel Trade

WTO has long called for converting non-tariff barriers into tariffs. This is called tariffication. Utilizing a two-country model, this paper examines the welfare effect of tariffication on parallel trade. We also compare the R&D levels of the manufacturer before and after tariffication. It is found that tariffication is socially undesirable for the domestic country no matter whether the manufacturer adopts one-part or two-part tariff pricing. But the effects of pricing on the manufacturer's R&D are very different. If the domestic manufacturer adopts two-part (one-part) tariff pricing, tariffication discourages (has no effect on) the R&D investment of the domestic manufacturer. This implies that domestic welfare worsens in the long run under two-part tariff pricing.