Tariffs, Smuggling and Economic Welfare: A Spatial Analysis of Nigerian Rice Policy Options

Abstract

In this paper, we analyse the welfare implications of alternative tariff rates in Nigeria given the government's goals of spurring domestic production and reducing imports utilising a spatial multi-market model that explicitly takes into account the potential for smuggling. Because smuggling occurs through the diversion of imports from the official port of entry in the south to the north, our modelling framework also captures the spatial effects of higher tariffs on changes in rural and urban prices, production and consumption, the flow of trade, and welfare, across different parts of the country. Results show that tariff rates that exceed about 40% introduce some smuggling through the north when it becomes more profitable than importing through official channels in the south. It is also at this tipping point that government tariff revenues are maximised. At higher tariff rates with smuggling, the south experiences greater welfare losses, especially in urban areas.