Dissolving the Optimal Tariff Theory

Abstract

This paper proves that most previous studies to solve for the optimal tariff rate have committed various mathematical mistakes. When the mistakes are corrected, such studies actually derive zero tariff rate. This paper then shows that the so-called tariff-protected offer curve does not exist, as tariff changes only the terms of trade, and in a way very unfavorably to the host country. Imposing tariff is like hitting one’s own feet with one’s stones, and is actually lowering the host country’s welfare. To increase the gain from trade, a country must improve production efficiency.