Optimal Tariff Research Articles

The Size of Symmetric Free-Trade Blocs and World Welfare

In a symmetric model of free-trade blocs, the seemingly innocuous normalization rule by setting the world price of a given good as the numeraire will cause asymmetry in the Nash equilibrium. This paper presents a new symmetric tariff game approach and a new price normalization rule that are logically required and consistent in order to examine the effects of changes in the size of free-trade blocs on world welfare. In a symmetric model, a trading bloc does not act on the actions of the rest of the world as a whole but to individual external blocs in a one-to-one fashion. The relative bargaining power between any two blocs is always evenly matched. We show that the optimal tariff schedule is monotonically decreasing in relative bloc size, and the world welfare unambiguously increases if the trading world becomes more integrated. As a result, the pessimal (lowest world welfare) bloc number is much larger than the ones obtained in the Krugman and Bond-Syropoulos models. Our results support Ohyama-Kemp-Wan-Shimomura's findings and strengthen the case for regionalism as a stepping stone (building block) toward a complete world economic integration. The paper thus provides a theoretical foundation for the benefits of economic integration.

Some Mathematical Aspects of Price Optimisation

Calculation of an optimal tariff is a principal challenge for pricing actuaries. In this contribution we are concerned with the renewal insurance business discussing various mathematical aspects of calculation of an optimal renewal tariff. Our motivation comes from two important actuarial tasks, namely a) construction of an optimal renewal tariff subject to business and technical constraints, and b) determination of an optimal allocation of certain premium loadings. We consider both continuous and discrete optimisation and then present several algorithmic sub-optimal solutions. Additionally, we explore some simulation techniques. Several illustrative examples show both the complexity and the importance of the optimisation approach.

Policy Cooperation, Incomplete Markets, and Risk Sharing

The paper derives “targeting rules” for optimal policy in a simple two-country model in which financial markets are incomplete and policy is noncooperative. The optimal rules are compared with the cooperative case. Although the model is simple, it is complex enough so that the distortion introduced by incomplete financial markets matters. The complete markets case serves as a benchmark. Under complete markets, it is shown that the policy response in one state of the world influences outcomes in all other states through the effect on asset prices. It is noted that monetary policy cannot replicate an optimal tariff, so that the absence of a tariff instrument is a distortion even in the complete-markets economy. We show that optimal policy, even under complete markets and cooperation, does not try to minimize spillovers.

Optimal Tariffs with Smuggling: A Spatial Analysis of Nigerian Rice Policy Options

Utilizing a spatial multi-market model for rice in Nigeria that explicitly takes into account the potential for smuggling, in this paper we analyze the welfare implications of alternative rice tariff rates given the government’s goals of spurring domestic production and reducing imports. Because smuggling occurs through the diversion of imports from Lagos, the official port of entry in the south, to the north, our modeling framework also captures the spatial effects of higher tariffs on changes in rural and urban prices, production and consumption, the flow of trade in rice, and welfare across different parts of the country. Results show that tariff rates that exceed about 40 percent introduce some smuggling of rice through the north when smuggling becomes more profitable than importing through official channels in the south. It is also at this tipping point that government tariff revenues are maximized. At higher tariff rates with smuggling, the south experiences greater welfare losses, especially in urban areas.

A new trade network theory: What economists can learn from engineers

This paper introduces a new trade model type combining the gravity model used by economists and network analysis methods used by electrical engineers. The new model type contributes to the trade network literature by enabling the description of complex dynamic processes, such as the propagation, overlap and cancellation of shocks and business cycles. This opens many possibilities for future policy applications with disaggregated model regions and sectors. The paper furthermore contributes to trade theory by deriving a straightforward rule for the optimal tariff respectively trade barrier. Calibrating the model to the World Input-Output Database (WIOD), the optimal trans-Pacific trade barrier between North America and Asia is estimated to be one third of the current trade barrier. The analysis identifies strong repercussions on global trade caused by increased trans-Pacific trade.

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.

Modelling a BMS-based automobile liability rating system: The Serbian case

In this paper the authors examine the viability of applying a bonusmalus system in establishing automobile liability premium rates. They have developed an optimal tariff system which reflects the equivalence principle between the amounts of the premiums and the reported losses of individual policyholders. Based on past incidents of the policyholders, a homogeneous distribution of the risk classes and an improved insurance rating have been obtained. The developed model was tested with the negative binomial distribution and the expected value principle on a sample of 98,978 policyholders in Serbia. As a result, the set tariff system has been financially balanced, i.e. a balance was struck between the cost amounts of total premiums among policyholders and the cost amount of expected future claims. It has been proven that, in the process of modelling the automobile liability rating system based on the frequency of claims, it is optimal to use sophisticated distribution models such as the negative binomial distribution.

Tariffs, vertical specialization and oligopoly

We examine optimal tariffs in an environment with vertical specialization where the Home country specializes in final goods and the Foreign country specializes in intermediate inputs. A matched Home–Foreign pair bargains simultaneously over the input price and the level of output, and competes a` la Cournot with other matched pairs in markets. We find that the optimal Home tariff rate is strictly decreasing in the bargaining power of Home firms, and an increase in the Home firms׳ bargaining power might therefore raise Foreign profits. Under an endogenous market structure with entry followed by matching, the relationship between bargaining power and output is non-monotone if the demand function is strictly concave or convex. This in turn induces a non-monotone relationship between the optimal tariff and bargaining power for a class of demand functions. For linear demand, free trade is optimal irrespective of bargaining power. We show that non-monotonicity result is retained under endogenous bargaining power.

Progressive Optimal Technology-based Border Carbon Adjustment (POT BCA) - A New Approach to an Old Carbon Problem

The idea of Border Carbon Adjustment (BCA), which makes it possible to transform the standard tax on carbon emissions from production (origin principle) to a tax system imposed at the point of consumption (destination principle), has received a considerable amount of attention from academia and policymakers. In this paper, we go back to the source of environmental destination-based taxation and generalize the results of Markusen (Journal of International Economics, 5, 15–29, 1975) for optimal tax and tariff by extending domestic environmental policy on both goods featuring positive carbon intensities. Following Jakob et al. (Environmental and Resource Economics, 56(1), 47–72, 2013) we remove the strategic term from the optimal tariff and deal with the so-called optimal carbon tariff, targeting primarily environmental externality. Further, we develop a handy approximation for optimal tax and optimal carbon tariff structure in a multiple good setting. Such trade taxation is, however, likely to face further legal obstacles, which may hinder its implementation. This motivates us to adjust the results accordingly and to include refunds for low-carbon investments in a ‘dirty’ country granted proportionally to the difference in carbon intensities between trade partners. This new scheme, known as Progressive Optimal Technology-based Border Carbon Adjustment (POT BCA), mitigates several legal problems and increases political acceptance compared to the ‘standard’ BCA. It can also be seen as advantageous from the economic point of view: it mimics the performance of the optimal carbon tariff while aiming to decrease foreign carbon intensity over the long term.

Trade Protection with Two-Sidedness

The traditional model of trade protection against a foreign monopolist suggests that a home country should often impose a tariff on the foreign firm, even though this introduces an additional distortion. In this paper, I generalize the traditional model to include a basic network externality, e.g., the foreign firm also generates third party advertisement revenue from its product, and I determine that the network externality will result in a positive optimal tariff under a larger set of convex functions than in the traditional model. In this case, the firm has an additional gain from sales and so it is willing to bear a larger burden of the tax to maintain sales. Extending the model to include two-sided products (e.g., smartphones with consumers and app providers or video game consoles with consumers and game developers) leads to further results. With two-sidedness, the firm is able to alleviate some of the burden of the tariff through rent transfers from one side of the market to the other which makes a positive tariff policy optimal for these industries.

Promoting Trade Liberalization: Theoretical Analysis of Foreign Aid as Prize

AbstractWe investigate whether foreign aid can be used to induce trade policy reforms. We develop a two‐period political economic model where promise of aid in period 2 depends on chosen tariff in period 1. We consider three scenarios depending on whether the donor is passive/active and whether the two governments move simultaneously or sequentially. We find a sufficient condition for unconditional aid to increase the level of optimal tariff, and the possibility of unconditional aid increasing optimal tariff decreases when the donor is active rather than passive.

Partial Replacement of Protective Tariffs by Production Subsidies and Welfare

Using a two-country framework, this paper examines the welfare effect of partially replacing a tariff with a production subsidy. It considers some plausible situations for industry protection, including where the initial tariff is higher than the optimal tariff, where a certain output of the protected commodity must be maintained, and where domestic production of the sector yields some externalities. In these cases it is shown that the partial replacement benefits the country. Properties of the optimal replacement are also explored.

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.

Tariff regulation with energy efficiency goals

We study the optimal tariff structure that could induce a regulated utility to promote energy efficiency by its customers given that it is privately informed about the effectiveness of its effort on demand reduction. The regulator should optimally offer a menu of incentive compatible two-part tariffs. If the firm's energy efficiency activities have a high impact on demand reduction, the consumer should pay a high fixed fee but a low per unit price, approximating the tariff structure to a decoupling policy, which strengthens the firm's incentives to pursue energy conservation. Instead, if the firm's effort to adopt energy efficiency actions is scarcely effective, the tariff is characterized by a low fixed fee but a high price per unit of energy consumed, thus shifting the incentives for energy conservation on consumers. The optimal tariff structure also depends on the cost of the consumer's effort (in case the consumer can also adopt energy efficiency measures) and on the degree of substitutability between the consumer's and the firm's efforts.

A Comparison of Optimal Tariffs and Welfare under No Lobbying, Domestic Lobbying and Domestic‐foreign Lobbying

AbstractWhether and what type of the lobbying‐induced trade policies can improve the domestic welfare? We show that as compared to the case of no lobbying and the case of domestic lobbying, the domestic‐foreign lobbying may achieve the lowest tariff and may also realise the highest welfare for the domestic country. Our finding provides a theoretical explanation to the prevalent lobbying competition between Asian firms and US firms in USA recently. We argue that the domestic‐foreign lobbying may contribute to a freer trade in the domestic country, and lobbying competition may be one of the strongest forces pushing for trade liberalisation.

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.

A Large Country Imposing Import Tariff: Optimal Import Tariff in Terms of Adjustment Weights

This paper derives all the formulae of interest in autarky, free trade, and after an import tariff imposed by a large country in terms of competitive three adjustment weights based on market inverse demand and domestic inverse supply and the ratio of inverse supplies slopes. It also offers comparisons of results of free trade with autarky and after tariff with free trade. For the first time in the literature, this paper finds the range of import tariff that ensures the beggar-thy-neighbor policy and a formula for the optimal tariff that maximizes the tariff imposing country’s welfare.

A techno-economic optimization of decentralized renewable energy systems: Trade-off between financial viability and affordability—A case study of rural India

Ensuring financial viability for a decentralized renewable energy project and still setting tariffs within the affordability of the users in remote areas with low income is a major challenge. Many decentralized rural electrification projects suffer from financial shortage during operation partly due to lack of tariff revenue. However, if tariff is set beyond reasonable level, it would limit the number of beneficiaries of the project. This study proposes, by taking tariff level as a parameter, a design method that seeks balance between financial viability and affordability. Through the proposed method, relationship among design parameters such as tariff, number of consumers, system cost, revenue projection, degree of cost recovery, and required government subsidy, are identified in a quantitative manner. The design method is further demonstrated by its application to a sample project site in India. As a result, the optimal tariff level is identified in terms of the degree of cost recovery. However, taking into consideration affordability, another option of lower tariff is also possible as far as government subsidy is available to cover shortfalls. Policy makers need to decide tariff setting which would resolve the trade-off to the extent possible by taking into account availability of government subsidy.

Optimal strategic oil stockpiling and import tariffs: The case of China

As two of the most important instruments for dealing with the issues of energy supply security, strategic petroleum reserves (SPRs) and oil import tariffs have been proven effective in developed countries. While China is currently building up its strategic oil reserves to ensure energy security, it is of great importance to investigate China's optimal oil stockpiling policies while taking into account the possibility of imposing an import tariff or quota, which can also be used for alleviating the energy insecurity of an oil-importing country. Employing a dynamic programming framework, this paper examines the optimal SPR policies and oil import tariffs or quotas for China and the interactions between the two instruments under different scenarios for the world oil market. The results show that the combination of optimal tariffs and SPR policies can substantially reduce the expected oil insecurity cost for China; the effect is larger when the probability that a disruption will continue is higher.

Reconciling Observed Tariffs and the Median Voter Model

Median voter theory applied to trade policy predicts positive tariffs in capital‐abundant countries and negative tariffs in labor‐abundant countries. Negative tariffs are rare, and this paper reconciles the median voter theory with observed protectionism across countries. By considering large countries, I show the optimal tariff is a sum of the median voter component and a positive term of trade component. Positive terms of trade effects raise tariffs in all countries, and can overcome the negative median voter component in labor‐abundant countries. Testing the tariff prediction with cross‐section and panel data from the 1990s, I show the median voter component is negative in labor‐abundant countries and positive in capital‐abundant countries. As expected, terms of trade effects raise tariffs across all countries and are stronger among nonmembers of the WTO.