Optimal tariff calculations in alternative trade models and some possible implications for current world trading arrangements

Abstract

In this paper we report calculations of optimal tariffs both with and without retaliation in a sequence of 2 × 2 trade models. We extend the earlier calculations by Johnson (1954, 1961) and Gorman (1957) which assume constant elasticity offer surfaces by using functional forms from the Cobb-Douglas/CES/LES family for utility functions and by also incorporating production into our calculations. Results indicate that the most critical parameters in any such calculations for a 2 × 2 model are the import prices elasticities and we briefly survey the empirical evidence as to their values. Our major conclusion is that these models confirm the suggestion from casual inspection of reported trade elasticities that current levels of tariff protection are some distance from optimal tariffs and that the margin for tariff retaliation in a worldwide trade war is potentially large. Other implications of the results are explored in the text.