Uniform versus Discriminatory Tariffs: When Will Export Taxes Be Used?

Abstract

1. IntroductionThis paper attempts to combine two branches of strategic trade policy literature together by analyzing choices of export subsidies and import taxes in a unified framework. It aims to provide a better insight into the interactions among the governments of two exporting countries and an importing country.In a seminal paper, Brander and Spencer (1985) show that under Cournot competition a domestic export subsidy allows a domestic firm to gain at the expense of a rival firm in another exporting country. Their paper initiated a great deal of interest in the proper use of export subsidies.1 It is noted that in the Brander-Spencer and related models, the government of the third country, which imports the goods from the two countries, is assumed to be inactive. On the other hand, there is a separate literature that analyzes the optimal policies for an importing country, which buys a homogeneous product from two countries with rival firms. For example, Gatsios (1990) and Hwang and Mai (1991) show that the optimal policy for the importing country is to impose a higher tariff on the product from the more cost-efficient exporter. Choi (1995) and Horiba and Tsutsui (2000) extend the literature by comparing the impacts of discriminatory and uniform tariffs. Both of these two papers examine the choice of the two tariff regimes by the importing country, and investigate how a regime may affect the level of technologies chosen by the exporting firms. All these papers focus on the policies of the importing country, while assuming that the exporting governments are inactive.In this paper, we consider a model similar to those examined by all these papers: two exporting countries and one importing country, with one firm in each of the exporting countries competing in a Cournot way. What makes the present paper different from others is that we allow all three governments to be active in choosing the optimal values of their policies: an export subsidy/tax for each exporting country and a tariff/subsidy for the importing country. We also analyze the impacts of two different tariff regimes: a uniform tariff regime, as required by the Most-Favored-Nations (MFN) clause of the GATT/WTO, and a discriminatory tariff regime. Choosing between these two types of tariff regimes is an interesting issue in the present framework, because it not only determines the welfare of the importing country, but also affects the export subsidies chosen by the exporting countries. The present, more extensive model and analysis, as compared with what exists in the literature, can be used to answer several questions. If each exporting country is aware of the tariffs to be imposed by the importing country on the products from itself and its rival, does it still have an incentive to impose an export subsidy, as Brander and Spencer proposed? Does such an export subsidy depend on whether the importing country is using discriminatory tariffs or a uniform tariff? How might the noncooperative equilibrium in terms of export subsidies be affected by the tariff regimes chosen by the importing country? What is the optimal tariff of the importing country in response to the export subsidies chosen by the exporting countries? How would the importing country choose between the two tariff regimes? How would the welfare of these countries be affected by the policies and the policy regimes?Some of the results obtained in the present paper can be linked to the existing results. Under a uniform tariff regime, as required by the MFN clause, the Brander-Spencer argument kicks in, and each country has the right incentive to promote the export of its own firm with an export subsidy. If the importing country is using discriminatory tariffs, the argument in the papers by Gatsios (1990), Hwang and Mai (1991), Choi (1995), and Horiba and Tsutsui (2000) is applicable: An importing country tends to impose a higher tariff on the more cost-efficient exporter. …