Abstract
By an intra-industry trade model with mobile capital, we examine the characteristics of optimal tariffs and tariff wars. In contrast to folk wisdom on optimal tariffs, we show that when capital intensity in production is high, larger countries can apply lower tariff rates, tariffs may behave as strategic complements, and smaller countries can win tariff wars. This occurs when tariffs have a strong impact on output expansion, and the negative effect of tariffs on foreign demand based on the increase in capital rent plays a key role. In addition, we can show that in a tariff war between two symmetric countries, a rise in capital intensity lowers the equilibrium tariff rate and the welfare loss in ratio. In other words, higher intensity of mobile capital alleviates excessive tariff competition.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
