Optimal Tariff Research Articles

Trade sanctions and green trade liberalization

ABSTRACTThis paper studies the impact of a World Trade Organization withdrawal of trade concessions against countries that fail to respect globally recognized environmental standards. We show that a punishing tariff can be effective when environmental and trade policies are endogenous. When required standards are not too stringent with respect to the marginal damage of pollution, compliance along with free trade as a reward is the unique equilibrium outcome. A positive optimal tariff in the case of non-compliance prevents complete relocation to pollution havens, but only works as a successful credible threat and does not emerge in equilibrium.

Trade policy in a “super size me” world

When a foreign monopolist sets a single market clearing price for its product, the sign of the optimal tariff is determined by the extent of pass through (also known as the terms of trade effect). However, when a foreign monopolist employs a second degree price discrimination mechanism in the domestic market the calculus of welfare maximization is very different. While there are still terms of trade effects from the imposition of a tariff, the existence of such effects are neither necessary nor sufficient to determine the sign of the optimal tariff. Instead the distribution of valuations within the population is the key determinant of the nature of policy intervention. This result differs significantly from the uniform price case and is driven by the incentive compatibility constraint which places the distribution of types at the center of the analysis. If there is a relatively large fraction of high valuation types in the population, then domestic information rents may be increased by subsidizing imports thereby increasing the consumption of the low valuation types and moving the incentive constraint in favor of the high valuation types. However, if the share of high types in the population is relatively small then the increase in information rents will also be small but the fiscal implications of a subsidy will be large. Consequently, the optimal policy will be to impose a trade tax.

Performance evaluation of the use of accumulating systems in the power industry

Under rapid surges in gas prices, the difference in the costs of electric power production between peak (and half-peak) and base load plants is quickly increasing, so that accumulating systems that allow transfer of cheap night energy to peak and daytime zones have proved highly efficient. A method to evaluate the economic efficiency of such accumulating systems is presented, which is based on model simulation in order to find the optimal tariffs differentiated by time zones.

An adjustment scheme for nonlinear pricing problem with two buyers

We examine a contracting problem with asymmetric information in a monopoly pricing setting. Traditionally, the problem is modeled as a one-period Bayesian game, where the incomplete information about the buyers’ preferences is handled with some subjective probability distribution. Here we suggest an iterative online method to solve the problem. We show that, when the buyers behave myopically, the seller can learn the optimal tariff by selling the product repeatedly. In a practical modification of the method, the seller offers linear tariffs and adjusts them until optimality is reached. The adjustment can be seen as gradient adjustment, and it can be done with limited information and so that it benefits both the seller and the buyers. Our method uses special features of the problem and it is easily implementable.

Strategic Trade Policy, Spillovers, and the Uncertain Mode of Competition: Cournot vs. Bertrand

In this paper we discuss the incentives of a welfare maximizing government to implement strategic trade policy when there is, on the one hand, uncertainty about the relevant market information (like the type of competition, demand function, cost function, etc.), but, on the other hand, the environment of the contest between the firms is specific: there are two firms and the interaction among them is accompanied by technological spillovers from the domestic firm to the foreign firm. The two bench mark oligopoly models – Bertrand and Cournot – are assumed to be possible types of market competition. In order to analyse the problem of strategic policy under uncertainty, it is first necessary to work out in depth the optimal tariff policy in perfect information setup for both the Cournot and the Bertrand case. We argue, then, that the informational criticism of strategic trade policy is less relevant than was previously thought.

Some Mistakes in the so-called Optimal Tariff Theory

This paper points out some mistakes in the so-called optimal tariff theory. When they are corrected, the trade model does not offer any welfare implication. It removes a major blocking stone for the World Trade Organization to promote free trade.

Optimal Tariffs on Exhaustible Resources in the Presence of Cartel Behavior

We present a model of bilateral monopoly between resource-importing countries and a resource-exporting country. We show that there exists a threshold level of marginal cost beyond which the resource-importing coalition would prefer bilateral monopoly to free trade. In the case of two non-collusive asymmetric importing countries, we show that asymmetry of market sizes also plays a role in determining the welfare gains under free trade or tariff war. As importing countries become more asymmetric, their aggregate welfare is more likely to be higher under the tariff war.

Tariff wars in the Ricardian Model with a continuum of goods

This paper describes strategic tariff choices within the Ricardian framework of Dornbusch, Fischer, and Samuelson (1977) using CES preferences. The optimum tariff schedule is uniform across goods and inversely related to the import demand elasticity of the other country. In the Nash equilibrium of tariffs, larger economies apply higher tariff rates. Productivity adjusted relative size (≈ GDP ratio) is a sufficient statistic for absolute productivity advantage and the size of the labor force. Both countries apply higher tariff rates if specialization gains from comparative advantage are high and transportation cost is low. A sufficiently large economy prefers the inefficient Nash equilibrium in tariffs over free trade due to its quasi-monopolistic power on world markets. The required threshold size is increasing in comparative advantage and decreasing in transportation cost. I discuss the implications of the static Nash-equilibrium analysis for the sustainability and structure of trade agreements.

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.

La tarification douanière dans un optimum de compromis

The purpose of this paper is to integrate into a general model of an open economy the study of optimal wedges on domestic and foreign transactions. While it has been customary in the literature to link the analysis of domestic taxes to the provision of public goods, the model presented here views the imposition of taxes and tariffs in the general context of internal and external monopolies. As such, the paper begins with the idea of a compromised optimality. This means essentially that a modern society, while maximizing the welfare of its members, is constrained by other internal objectives such as the fact that the State shares its monopoly power with several other economic entities (for instance employers' federations, trade-unions). Thus, the mere fact of levying taxes gives a State some monopoly power which, in a sense, is similar to that of a Cournot-type monopolist who "imposes" private taxes. On the other hand, given the possibility that a country with some monopoly power in international trade could improve its situation by imposing tariffs, the analysis lends itself to the study of tariffs and taxes in the broad context of optimal wedges. To allow for this characterization, the paper incorporates into the model of normalization. As a by-product of this, a) it establishes, in terms of generalized inverses of the Slutsky matrix, a link between domestic marginal relative revenues and foreign ones; b) it defines two concepts of optimal tariffs evaluated from f.o.b. prices and c.i.f. prices; c) it suggests some further extensions such as the analysis of transactions costs, the incorporation of market retaliations and cultural characteristics of goods.

Strategic licensing, exports, FDI, and host country welfare

This paper analyses the preference of a foreign firm over serving a host country market and its impact on the host country welfare. We show that the foreign firm can choose licensing its superior technology to a host firm strategically which influences the foreign firm's subsequent preference over exporting and FDI. The effect on the host country welfare depends on the structure of license fee and it is shown that strategic licensing might lead to welfare loss for the host country. To this end this paper also prescribes either an optimal tariff scheme or a ban on licensing to maximize the host country welfare. Copyright 2010 Oxford University Press 2009 All rights reserved, Oxford University Press.

Nonlinear Pricing under Bounded Rationality

In this paper we introduce bounded rationality into the standard Mussa and Rosen (1978) model. We obtain the necessary conditions for the monopolist to benefit from the boundedly rational behavior of the consumers and discuss the incidence of costs of boundedly rational behavior. We also obtain the integro-differential equation for the optimal tariff and study some of its properties. In particular, we find that in many interesting cases the optimal tariff is steeper than the one under perfect rationality, while the monopolist earns higher profits. This implies that the consumers' welfare decreases compared to the case of full rationality due to two effects: decrease of the total social surplus and the suboptimal choice of the good.

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.

A Trade-Promoting Trade Theory

This paper first disproves the traditional trade theory and its optimal tariff implication. Then, it develops a theory to explain trade liberalization, which shows that liberalization increases output and profit to the benefit of the host country. This paper supports the works by WTO.

Optimal tariffs of preferential trade agreements and the tariff complementarity effect

PurposeThe purpose of this paper is to evaluate and contrast the welfare effects of free trade agreements (FTAs) and customs unions (CUs) on member and non‐member countries when tariffs of both members and non‐members are endogenously determined. It also aims to provide sufficient conditions under which both types of preferential trade agreement (PTA) are likely to lower tariffs on non‐members relative to that under most favored nation (MFN).Design/methodology/approachThe paper employs a three country Cournot oligopoly model of trade with segmented markets.FindingsIt is shown that under symmetry CU members enjoy higher welfare relative to that under an FTA or MFN. Furthermore, the non‐member country gains from the formation of a PTA so long as the PTA's external tariff falls below a certain threshold. However, for FTA members to necessarily gain, their external tariff needs to be greater than this threshold but smaller than twice their MFN tariffs. Outside this tariff range, welfare effects of FTAs are ambiguous in the absence of further assumptions. The paper also isolates sufficient conditions under which a PTA member is less likely to impose a positive tariff on the non‐member relative to that under MFN.Originality/valueUnlike existing literature, we do no assume demand linearity to obtain our main welfare results and use this assumption only for illustrative purposes. Another contribution of the paper is to provide sufficient conditions under which a PTA member is less likely to impose a positive tariff on the non‐member relative to that under MFN.

Labor standards, labor-management bargaining and international rivalry

Using the labor union's bargaining power as an indication of government policy on labor standards issues, we analyze the competition between a domestic (North) firm and a foreign (South) firm, and their relationship with optimal labor standards (LS). First, we show that the optimal level of LS is higher when labor unions are employment-oriented than when they are not. Second, it is higher under free trade than under the optimal tariff system if labor unions are employment-oriented. Third, ‘a race to the bottom’ of LS occurs in the case of wage-oriented unions. Fourth, the North's imposing a tariff to force the Southern government to raise its LS is effective only if the Southern union is wage-oriented. In order to raise Southern LS, both countries may need some deeper form of economic integration, if the North does not want to abandon its free trade system.

Optimum tariffs and retaliation: How country numbers matter

This paper identifies a new terms-of-trade externality that is exercised through tariff setting. A North–South model of international trade is introduced in which the number of countries in each region can be varied. As the number of countries in one region is increased, each government there competes more aggressively with the others in its region, by lowering its tariff, to attract imports from the other region. In doing so, all countries in a region exert a negative terms-of-trade externality on each other, collectively undermining their own terms of trade and welfare. This externality can increase efficiency if the numbers of countries in both regions are increased simultaneously.

Trade policy and mixed enterprises

Abstract This paper demonstrates that the degree of state ownership affects neither the level of socially optimal activities nor welfare if the government chooses optimal trade policy instruments. In the case of rivalry in the home market, the optimal import tariff is independent of the degree of state ownership, and the optimal production subsidy decreases with state ownership if the optimal tariff is positive. For the case of Cournot rivalry in a third market, the optimal export subsidy increases with state ownership, while in the case of Bertrand rivalry with differentiated products, the optimal export tax increases with state ownership.

The Socially Optimal Import Tariff and Tax Credit for Ethanol with Farm Subsidies

We determine how the U.S. ethanol tax credit and import tariff affect the corn-ethanol-gasoline markets and how farm subsidies interact with these policies. We show how the ethanol tax credit and import tariff each uniquely affect the ethanol and gasoline prices. The ethanol import tariff alone increases the terms of trade in ethanol imports and corn exports, but decreases the terms of trade in gasoline imports and the tax costs of farm price supports. With price-contingent farm subsidies in place, the optimal tariff and tax credit will depend on the price level. When farm subsidy expenditures are high, import subsidies for ethanol may increase social welfare due to the substantial size of the fuel market relative to the corn market.