International Duopoly, Tariff Policy and the Superiority of Free Trade

Abstract

This paper addresses the effectiveness of tariff policy in the long-run production framework in which decisions must be made about plant size and the level of output to be produced by foreign duopolists competing with each other in the importing country's market. We consider two types of tariff regime, discriminatory and uniform, and show that the importing country's welfare is unambiguously higher in the uniform tariff case. We consider free trade in the same production framework and show that, as the long-run capacity decision becomes increasingly relevant relative to the short-run quantity decision, free trade dominates tariffs in welfare rankings. JEL Classification Number: F1.