Equilibrium Tariff Research Articles

Infant-industry tariff protection with pressure groups

This paper analyzes the increasing tariff protection in the Spanish iron and steel industry over the first third of the 20th Century. Learning effects are explicitly included to model a dynamic game of trade liberalization. The government chooses the tariff level while firms decide how much to produce each period. Firms' production decisions determine their future cost levels. Assuming that learning reduces only fixed costs, the dynamic game may be solved in closed form, so that the optimality and time consistency of the actual policy can be evaluated. Furthermore, the model is used to measure the relative importance of producers and consumers on the government's equilibrium tariff strategy. The model is calibrated for year 1913 and it is shown that the existence of important, unexploited, dynamic economies of scale may have justified high tariff levels at that time. In addition the results also show that the Spanish iron and steel producers behaved more competitively than what is commonly assumed, and that the government's protection policy was not significantly conditioned by steel producers.

Lobbying, Innovation and Protectionist Cycles

This paper explains why trade liberalizations occur in developing countries, and why they are often reversed. It does so by focusing on the use of lobbying for protection by import competing firms as a means to postpone costly product quality upgrades to keep up with foreign competitors. Given the availability of a political market for import tariffs, domestic firms will lobby for a sequence of tariffs that insulate domestic profits from a widening quality gap, thereby allowing adjustment to be postponed. But as the contributions required by the government grow with the size of the quality gap, it will be optimal to adjust quality and to decrease the lobbying effort at some time, leading to liberalization and technological catch-up. But then the equilibrium tariff will again be small and cheap, and it will pay to start lobbying anew, until the next quality adjustment. Therefore, cycles in protection will occur as a result of the use of lobbying as a substitute for innovation. The model thus sheds new light on the impact of the costs of protection on the effectiveness of the lobbying effort over time, and on their implications for the timing and the time horizon of trade reforms in developing countries.

The size of trading blocs Market power and world welfare effects

We construct an n-country n-commodity trade model to analyze the implications of bloc size for (Nash) equilibrium tariffs and welfare. The relationship between the absolute size of (symmetric) trading blocs and their market power is ambiguous, and we illustrate how this relationship varies with model parameters. In contrast, sufficiently large increases in the relative size of a bloc enhance its relative market power and cause the welfare of its country members to rise above the free trade level. We establish the existence of an optimal bloc size, and study the dependence of optimal size on the parameters of the model.

Tariffs with private information and reputation

Several tariff games are examined in which the home country has private information about whether its government is a low or high tariff type. If the foreign government is uncertain about this type in a one-shot game, its Nash equilibrium tariff will be lower (higher) than if it knew the home government were a low (high) tariff type. In two multistage games misleading behavior by the home government is an equilibrium strategy for sufficiently high discount factors. Whether or not uncertainty is persistent is important for welfare results. Tariff rules do not necessarily dominate discretionary policy in these models.

Nash Equilibrium Tariffs for the United States and Canada: The Roles of Country Size, Scale Economies, and Capital Mobility

A theoretical analysis of (Nash equilibrium) tariff rates is presented. A numerical general equilibrium model is then used to find Nash equilibrium tariff rates for the United States and Canada. The Nash equilibrium tariffs are small relative to partial equilibrium estimates: 18 percent for the United States and 6 percent for Canada. The United States is essentially indifferent between the Nash equilibrium and free trade, while Canada is better off at the latter by $4 billion. Empirical results support theoretical predictions that the optimal tariff is smaller when the country is smaller, there are scale economies and free entry, and capital is internationally mobile.

Game-modeling multilateral trade negotiations

Using actual trade and tariff data for the United States and the European Community, this paper demonstrates how a trade negotiation such as the Tokyo Round can be modeled as a game among countries attempting to minimize individual welfare loss functions. First, we construct welfare functions based on suggested trade negotiation goals. We compute both the noncooperative Nash-Cournot equilibrium tariffs and the cooperative Nash equilibrium implied by these welfare functions. Welfare outcomes under the computed equilibrium tariffs are then compared with those arising from the initial tariff structure, as well as the tariff structure actually determined by the negotiation. We find that, while the game model tracks closely the decisions of the negotiators in the Tokyo Round, later unilateral political decisions resulted in less optimal tariffs.

A conjectural variation approach to strategic tariff equilibria

This paper examines tariff equilibria in a static two country trade model under a general class of conjectures regarding foreign retaliation. We assume that each country chooses its optimum tariff given some conjecture in this class and derive the associated conjectural tariff equilibrium, which can be thought of as a Nash equilibrium conditional on each country's conjecture about how the foreign country will retaliate. Our main contribution is to show that when marginal propensities to consume imports are sufficiently small, increased expectation of retaliation results in lower equilibrium tariffs for both countries. Since countries in general probably do expect some retaliation, it therefore appears that the traditional Cournot-Nash analysis probably overstates the trade restrictiveness of tariff wars.

Coordination of OECD oil import policies: A gaming approach

In this paper, we assume that the world oil price is an increasing function of the level of world oil demand and that OECD nations adopt tariffs to reduce their oil imports. We present a simple model to investigate issues related to the coordination of tariff policies between two regions: US and other OECD nations. We compare the optimal tariff of each region for three cases: 1. (a) unilateral case, 2. (b) noncooperative case, 3. (c) cooperative case. Under the local linearity assumption, it is found that, for each region, the cooperative optimal tariff is greater than the noncooperative equilibrium tariff, which is, in turn, greater than the unilateral optimal tariff. Both the cooperative and the noncooperative optimal tariffs lead to greater net outputs for these two regions. In order to implement the cooperative optimal tariff, however, an agreement on a uniform tariff and on side payments may be needed. We conclude by discussing a numerical example.