Optimal Tariff Rate Research Articles

International Rivalry in FDI Incentives and Strategic Responses

Purpose As globalization continues to expand since the 1990s, competition for foreign direct investment (FDI) has intensified all over the world. This paper tried to explore strategic relationships among developing countries in a race to attract multinational corporations (MNCs). Design/Methodology/Approach This study established a game-theoretical model with three stages, where governments of potential host countries set their policies to attract MNCs and impose a tariff on imported products. In addition, MNCs make their own locational decision after realizing policy sets of incentives and tariffs. Findings This paper found that an MNC will make a locational decision considering market size, cost advantages, FDI incentives, and tariff burdens. This paper also found that countries with a smaller market size and a weaker cost advantage are likely to raise FDI incentives to attract MNCs. In addition, the host country will raise the FDI subsidy when a non-host rival country sets a higher tariff on exports of the host country. We also found that the non-host country, which lost the race of attracting the MNC, will raise its optimal tariff rate if it has a bigger market, and the host country has a weaker cost advantage. In addition, the non-host country will raise the optimal tariff rate when the host country provides a greater subsidy to the MNC. Research Implications One of critical findings in this study is that the host country has no first-mover advantage in a race of FDI subsidies because it needs to provide a greater subsidy to attract the MNC when it moves first by providing FDI subsidies, and then the non-host country will react by imposing a tariff against the exports of the host country to the market of the non-host country.

Tariff simplification, privatization, and welfare superiority

AbstractIn importing trade model, Cournot competition occurs between domestic semi‐public and foreign firms in domestic market; the government implements specific/ad valorem tariff. We examine the welfare effect of tariff simplification. Under general demand function, when semi‐public firms are more efficient than foreign firms with low/high privatization, tariff simplification hurts/benefits the domestic country. When semi‐public firms are less efficient than foreign firms with medium privatization, tariff simplification hurts the domestic country; else, it benefits the domestic country. When the government adopts optimal tariff rate and optimal privatization, and domestic semi‐public firms are less efficient than foreign firms, optimal privatization increases after tariff simplification.

CSR in an oligopoly with foreign competition: Policy and welfare implications

This paper is concerned with the increasingly active role of governments in shaping and promoting corporate social responsibility (CSR). Introducing the cost of taxation into a governmental decision-making framework, the paper elucidates probable strategic substitutes and complements between CSR promotion and import tariffs, based on a welfare analysis. It shows that there exists an optimal degree of promotion for CSR and an optimal tariff rate imposed on foreign firms, but only if the cost of taxation is relatively low. In particular, it finds that this cost should be kept to a low level in countries that wish to enlarge consumer-oriented CSR initiatives and attract foreign exports.

Network externalities and tariff structure

In this paper, we show that with cost asymmetry, stronger network externalities and less differentiated goods, the uniform tariff rate set by the government of the importing country increases and the optimal discriminatory-tariff gap widens. In addition, under network externalities and good differentiation, we demonstrate that: (a) the optimal tariff policy is superior to free trade in maximizing the domestic social welfare; (b) the maximum-revenue tariff rate is always higher than the optimal tariff rate; (c) the consumer surplus and social welfare are always higher under the optimal tariff policy than under the maximum-revenue tariff policy.

The optimal tariff structure and foreign penetration

This study investigates tariff policies as a means of improving economic welfare. The government sets the tariff so as to maximize domestic welfare against foreign penetration. We examine the relationship between the optimal tariff structure and the degree of penetration. We find that the optimal tariff rate is non-monotonically related with the degree of penetration (inverse U-shape). We also show that intermediate degrees of foreign penetration are harmful for economic welfare.

Do industrial and trade policy lead to excess entry and social inefficiency?

This paper analyzes the welfare effects of industrial and trade policy instruments (output subsidies or/and import tariffs) in an international Cournot oligopoly and compares the social efficiency of specific policy instrument or dual policy instruments (output subsidies-cum-import tariffs) with free entry of domestic firms. It first demonstrates that free entry of domestic firms is always socially excessive irrespective of the policy regimes rate in an open economy. It then shows that optimal tariff rate and output subsidy rate under free entry of domestic firms will be lower than the one at regulated entry when the scale of domestic market is moderate; for dual policy regime, the optimal output subsidy rate at free entry is lower than the one at regulated entry, while the optimal tariff rate at free entry is higher than the one at regulated entry. Furthermore, even though the need of dual policy for welfare improvement is degenerate to be suboptimal with the free entry of domestic firms, but it is still superior to the subsidy policy.

Optimal Privatisation and Trade Policies with Endogenous Market Structure

This study investigates the short‐run and long‐run relationships of trade and privatisation policies. In both the short run and the long run, the optimal degree of privatisation is increasing in the import tariff rate. The optimal tariff rate is strictly positive in the short run but can be non‐positive in the long run. Thus, the long‐run analysis yields contrasting implications on trade policy in mixed oligopolies.

Grossman-Helpman's Manipulating Protectionism Theory

This paper disproves both the theory by Grossman and Helpman. When they have merely reproduced the tax incidence theory, their complicated methods are unnecessary. When a higher optimal tax rate means lower revenue, such theory is not optimizing. A ridiculous tax rate for the suppliers destroys their theory completely. When their original objective is reinstated, this paper proves that the optimal tax or tariff rate must be zero. Grossman and Helpman have nothing to sell.

The political economy of tariff protection in China: evidence from the WTO accession

AbstractWe analyze China's tariff rates at WTO accession using a political economy approach. A model drawing on Branstetter and Feenstra is used to derive an optimal tariff rate for each industry. The model predicts that a government would set a high tariff rate if an industry is of large state‐owned enterprise (SOE) share, multinational share, or small foreign import share. From the model we reveal the Chinese government's preference towards different interest groups under the binding tariff constraint from the WTO commitments. The estimated structural parameters imply that the political weights on both the SOE profits and consumer income diminish with the economic opening. More important, the government still favours SOEs over consumer income. Our findings are consistent with the special features of China's economy.

Welfare-optimal trade and competition policies in small open oligopolistic economies

Standard trade theory claims that free trade is welfare-enhancing. We show that this is not the case if at least one sector of the economy is a Cournot oligopoly. In a simple small open economy with one oligopolistic and one competitive sector, welfare is an inverted U-shaped function of tariffs. Hence, an optimal tariff rate can be determined. The optimal rate depends on the number of firms in the oligopolistic sector. Below the optimal level, the competitive sector overproduces, i.e. oligopolistic good have a higher marginal effect on welfare. Increasing tariff rates stimulate the production of the oligopolistic sector by dampening imports. Under balanced trade, this reduces exports and production in the competitive sector, thus shifting resources to oligopolistic goods production. We also find that given certain levels of protection, perfect competition is not welfare maximal and, hence, not desirable. The finding explains why developing economies with imperfect competition are often reluctant to embrace trade liberalization and why, conversely, countries with high levels of external protection may be unenthusiastic about competition theory.

Optimal intellectual property rights protection during an international health emergency

We analyze policy options during an international health emergency to provide consumers in least developed countries access to patented life-extending pharmaceuticals. Reliance on property rights exhaustion is shown to be insufficiently flexible and costly to implement. By contrast, the optimal degree of price discrimination can always be achieved with a properly specified tariff. We identify a trade-off between patent length and the relevant optimal tariff rate. If the patent length is too short (too long) there must be an offsetting higher (lower) than socially optimal tariff rate. When patent length can be manipulated as an explicit policy tool we identify a clear policy assignment. The tariff rate should be set to achieve social welfare objectives while the patent length can be used to control the resource cost of innovation.

Modelling and analysis of oil import tariff and stockpile policies for coping with supply disruptions

The potential economic damages from oil supply disruptions could be suppressed by emergency preparedness and response measures. As two of the most feasible response measures, oil import tariff and strategic petroleum reserve (SPR) could alleviate short-run oil supply and demand imbalance situations. This study develops a two period model to explore China’s optimal tariff rate and stockpiling size. Our objective is to minimize potential social welfare loss and macroeconomic loss associated with supply disruptions, as well as the policy cost. In a representative numerical case, we find China’s optimal tariff rate is $3.8/bbl and stockpiling size is 219.4million barrels. Higher tariff rate and lower stockpiling size are recommended contrast with current tariff and stockpiling policy. Additionally, by examining the net benefit of policy during a disruption, our result shows that the optimal implementation of tariff–stockpiling policy benefits most rather than single tariff or stockpiling policy does.

OPTIMAL TARIFF POLICY WITH ENDOGENOUS LOCATION CHOICE

This paper examines the optimal tariff policy of an importing country when duopoly firms choose to export or undertake foreign direct investment (FDI). We establish that (i) the government sets its optimal tariff rate to encourage FDI when the fixed cost of FDI is low. Choosing FDI creates a Prisoner's Dilemma for both firms and is not optimal for the source country; and (ii) when the fixed cost of FDI is high, the optimal tariff is set to induce both firms to choose exports.

Optimal trade policy in tariff games with inside money

We construct a bilateral trade model incorporating two physical goods and a financial asset (inside money) to discuss the optimal trade policy that countries would choose to maximize their respective utilities. In this Nash tariff game, the trade of physical commodities only occurs geographically across countries, and the trade of inside money allows for intertemporal allocation of consumptions. When the preferences, present and future endowments for each country are given, according to our numerical analysis, trade surplus or deficit (inside money) and optimal tariff rates are endogenously determined when general equilibrium conditions hold. One country may purchase inside money to shift current consumption to the future, and the other may be willing to issue inside money for smoothing its consumptions in two periods. This imbalance trade contradicts traditional trade models which imply a balanced trade policy. We further find that the price of inside money as an implied interest rate also is determined by the trade intervention policies.

The structure of Nash equilibrium tariffs

This paper examines theoretically the structure of optimal (Nash equilibrium) tariff rates in a two-country economy with more than two traded goods. We provide a condition under which the equilibrium tariff rates are uniform in both countries, and explore the relative size of the equilibrium tariff rates in each country when the uniform tariff condition is not satisfied. The elasticities of compensated excess demand for goods play an important role in characterizing the structure of the equilibrium tariff rates. This paper undertakes the analysis using a dual approach.

Optimal Tariff Rate When Domestic Firms Can DecideLocation of Industries

There is vast literature on the theory of optimal tariffs to maximize the economic welfare of a home country. The optimal tariff rate is positive in large countries, but the rate is zero in small countries. However, little attention, has been paid to the market structure in the concerned industries. Most of the literature focuses on a short run analysis or a long run analysis. In this paper, we present another concept of period, the intermediate run. In an intermediate run, each firm freely moves among industries, while the total number of firms in an economy is fixed.To address this issue, we developed an international trade model suitable for explaining the intermediate run. A fixed number of oligopolistic firms operate and each firm can locate (operate) either in an importing industry or a non-traded industry. The two industries have an identical market size, each domestic and foreign firm has the same cost function and each industry engages in Cournot competition.In this intermediate run model, the profit of each domestic firm is equalized in the two industries because each firm moves among industries to seek a higher profit. When free trade prevails in the importing country, domestic firms insufficiently locate in the importing industry from the economic welfare viewpoint. By imposing a tariff, more domestic firms locate in the importing industry in equilibrium, the resulting industry structure of the economy becomes more efficient and economic welfare is improved. Owing to this inter-industry movement of oligopolistic firms, observed only in the intermediate run, the optimal tariff rate becomes higher in the intermediate run equilibrium than in the short run equilibrium when the number of firms is fixed in each industry, that is, the short run.JEL Classification: F12, F13, L13

Optimal Tariffs: Should Australia Cut Automotive Tariffs Unilaterally?*

We derive formulas for the optimal tariff rate in four theoretical models. We start with a model in which industries are competitive and then successively allow for: monopoly pricing by export industries, revenue‐replacement costs and cold‐shower effects. The theoretical formulas accurately explain results from MONASH, a detailed computable general equilibrium model. A critical parameter in determining the optimal tariff is the export‐demand elasticity. Modellers are often reluctant to adopt empirically justifiable values for export‐demand elasticities because such values generate embarrassingly large optimal tariff rates. A way out of this dilemma is the adoption of a non‐linear cold‐shower specification.

The Structure of Optimal Tariff Rates under Retaliation

This paper examines theoretically the structure of optimal (Nash equilibrium) tariff rates under retaliation in a two-country economy with more than two traded goods. We provide a condition under which the equilibrium tariff rates become uniform in both countries, and explore the ranking of the equilibrium tariff rates in each country when the uniform tariff condition is not satisfied. The elasticities of compensated excess demands for goods play an important role in determining the ranking of the equilibrium tariff rates. This paper undertakes the analysis using a dual approach.

Global Welfare Implications of Carbon Border Taxes

This paper presents a simple, basic model to compute the welfare consequences of the introduction of a tariff on the CO2 content of imported goods in a country that already imposes a domestic carbon tax. The main finding is that the introduction of a carbon import tariff increases global welfare (and not just the welfare of the importing country) if there is no (or insufficient) pricing of carbon abroad. A higher domestic price of carbon justifies a higher import tariff. Moreover, a higher relative intensity of carbon abroad increases the desirability of high import tariff imposed by the home country because a border tax shifts production to the importing country, which in this case leads to lower environmental costs. If both instruments are used to maximise global welfare, the optimal domestic price for carbon should be higher than the external effects (assuming that there is no carbon pricing in the rest of the world) and the optimal tariff rate would be somewhat lower than the domestic carbon price. If the importing country has a fixed ceiling on emissions instead of a constant carbon price (as provided under the EU's Emissions Trading System), an import tariff is always beneficial from a global point of view and its imposition lowers the price of domestic allowances, but less than proportionally. CEPS Working Documents are intended to give an indication of work being conducted within CEPS research programmes and to stimulate reactions from other experts in the field. Unless otherwise indicated, the views expressed are attributable only to the authors in a personal capacity and not to any institution with which they are associated.

Dissolving the Optimal Tariff Theory

This paper proves that most previous studies to solve for the optimal tariff rate have committed various mathematical mistakes. When the mistakes are corrected, such studies actually derive zero tariff rate. This paper then shows that the so-called tariff-protected offer curve does not exist, as tariff changes only the terms of trade, and in a way very unfavorably to the host country. Imposing tariff is like hitting one’s own feet with one’s stones, and is actually lowering the host country’s welfare. To increase the gain from trade, a country must improve production efficiency.