Optimal Tariff Research Articles

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 tariff calculations in tariff games with climate change considerations

We discuss whether the introduction of climate change considerations into Nash tariff games increases or reduces post-retaliation tariffs. We briefly discuss how climate change considerations can be introduced into computational trade models. We then calculate optimal tariffs in comparable conventional (no climate change considerations present) and with climate change trade models. Results show that compared with conventional trade models, adding climate change considerations reduces the level of optimal tariffs, but this only occurs when the damage effects involved are large.

TARIFFS AND TRADE LIBERALISATION WITH NETWORK EXTERNALITIES*

This paper constructs a reciprocal market model of intra‐industry trade in network goods to consider the implications of network externalities for an optimal tariff policy and the welfare effects of bilateral tariff reductions. We show that the degree of network externalities nontrivially affects the sign of the Nash equilibrium tariff. Then, we prove that network externalities amplify the gains from tariff reductions. These results help better understand the implications of trade‐related issues in network industries.

An Audit of Clinical Coding in ENT Operations

Objective: Payment by results was introduced to the UK National Health Service in 2004. Specific payment tariff for ENT departments is determined by clinical code of the patient’s episode. Our aim was to review clinical coding in our department and assess scope for improving accuracy of coding and income tariffs. Method: We retrospectively reviewed coding of operations over a 4-month period. A database was obtained including primary operation code and payment tariff. Using a system that grouped operation codes according to anatomic site, we analyzed each case to see if actual code attributed to the procedure could be improved. Results: Over the 4-month period there were 930 operations; 866 (93%) were correctly coded with an optimal tariff, 19 (2%) were incorrectly coded giving an excessive total tariff of £24,840, and 45 (5%) were incorrectly coded losing a tariff of £37,381. Therefore, over the 4-month period, £12,541 was lost due to suboptimal coding. Conclusion: A system that groups ENT operation codes according to anatomic regions and procedure types efficiently aids the accuracy and optimization of income tariffs. It may be employed during the clinical coding process as a quality assurance tool.

Trade Wars and Trade Talks with Data

How large are optimal tariffs? What tariffs would prevail in a worldwide trade war? How costly would a breakdown of international trade policy cooperation be? And what is the scope for future multilateral trade negotiations? I address these and other questions using a unified framework which nests traditional, new trade, and political economy motives for protection. I find that optimal tariffs average 62 percent, world trade war tariffs average 63 percent, the government welfare losses from a breakdown of international trade policy cooperation average 2.9 percent, and the possible government welfare gains from future multilateral trade negotiations average 0.5 percent. (JEL F12, F13, O19)

Encouraging Trade Liberalization: Theoretical and Empirical Analysis of Foreign Aid as Prize

We examine how foreign aid can be used to induce a recipient country to engage in trade-policy reforms. First, we develop a two-country and two-period theoretical model where the donor's promise of aid in period 2 depends on the recipient's chosen tariff in period 1. Without aid, optimal tariff is positive because of the presence of lobbying in the recipient country. We consider three variants of the model depending on whether the donor government is passive or active, and, when the donor government is active, whether the two governments move simultaneously or sequentially. When the donor government is active, it optimally chooses the degree of ex-post conditionality on aid. We find, inter alia, that if a passive donor government increases the level of ex-post unconditional aid, or decrease the degree of ex-post conditionality, optimal tariff goes up. Using a panel data, we then examine if there is any evidence for the ex-post conditionality of aid, and how this conditionality has affected the effectiveness of aid. We find some positive evidence on both counts.

Foreign influence and welfare

How do foreign interests influence policy? How are trade policies and the viability of trade agreements affected? What are the welfare implications of such foreign influence? In this paper we develop a model of foreign influence and apply it to the study of optimal tariffs. In a two-country voting model of electoral competition, we allow the incumbent party in each country to take costly actions that probabilistically affect the electoral outcome in the other country. We show that policies end up maximizing a weighted sum of domestic and foreign welfare. Using this formulation we show that foreign influence increases aggregate world welfare when there are no other means of alleviating the externalities that arise from cross-border effects of policies. In contrast, when countries can engage in international agreements, foreign influence can prove harmful as powerful countries may refuse to offer concessions. We also show that power imbalances are particularly detrimental to cooperation when they are positively correlated with economic size.

Trade, Environment, and Welfare in a Model of Monopolistic Competition

In a North–South model of trade in which the market structure is monopolistically competitive, though North's attempt to reduce pollution creates a ‘pollution haven’ in South, its terms of trade improve and total number of varieties produced in the world economy may increase. The paper distinguishes between the direct and indirect welfare effects of North's environmental policy. While the direct effect on welfare is due to abatement, indirect effects are results of the policy's impact on prices, wages, outputs and varieties. A complex set of forces operate to determine indirect welfare effects of a tax or tariff on a pollution-causing raw material: the crucial factors are price elasticity of demand, elasticity of substitution between labor and raw material, South's trade orientation and the dependency ratios. An optimally chosen pollution tax directly hurts but indirectly benefits South. The indirect welfare effect of a tariff is similar to that of a pollution tax. However, a positive optimum tariff may not exist, in which case North's optimum policy would be free trade.

Keeping up with the Joneses, consumer ethnocentrism, and optimal taxation

This paper sets up a two-good (domestically- and internationally-produced goods) model of a small open economy with consumption externalities and uses it to examine the optimal taxation. Since keeping up with the Joneses leads an individual consumption's to impose a negative externality on the consumption of others, a consumption tax and tariff are thereby socially desirable to correct this distortion. Due to the fact that the government has to account for additional distortion caused by consumer ethnocentrism and that keeping up with the Joneses in the consumption of domestic goods tends to reinforce the influence of ethnocentrism on the purchase of domestic products, the consumption of imported goods is subject to a higher tariff rate because of the cross-market externality. Of interest, if consumption only involves an own-market externality, there is no cyclical consequence for the optimal taxes. However, if consumption involves both own- and cross-market externalities, the optimal tariff is state-contingent and, more specifically, is countercyclical.

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.

Is there an optimal tariff for African countries?

Economic theory suggests optimal tariff of zero for a small open economy, but revenue and political considerations make this impossible. Recommendations of 'the ideal' rates range from between zero and 40% for Sachs and Warner index to between zero and 25 for the UEMOA/ECOWAS, etc. So what determines 'optimal' tariff rates for African countries looking for trade policy anchors in a globalising world? This work evaluates considerations for determining tariff level consistent with growth aspirations of African countries. It recommends a country by country approach to tariff prescription giving consideration to the level of economic development and structure of production.

Optimal Tariffs, Retaliation and the Welfare Loss from Tariff Wars in the Melitz Model

This paper characterizes analytically the optimal tariff of a large one-sector economy with monopolistic competition and firm heterogeneity in general equilibrium, thereby extending the small-country results of Demidova and Rodriguez-Clare (JIE, 2009) and the homogeneous firms framework of Gros (JIE, 1987). The optimal tariff internalizes a markup distortion and a terms of trade externality. It is larger the higher the dispersion of firm-level productivities, and the bigger the country's relative size or relative average productivity. Furthermore, in the two-country Nash equilibrium, tariffs turn out to be strategic substitutes. Small or poor economies set lower Nash tariffs than large or rich ones. Lower transportation costs or smaller fixed market entry costs induce higher equilibrium tariffs and larger welfare losses relative to the case of zero tariffs. Similarly, cross-country productivity or size convergence increases the global welfare loss due to non-cooperative tariff policies. These results suggest that post WWII trends have increased the relative merits of the WTO.

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

Tariffs Ranking in Mixed Oligopoly with Revenue Constraint

Utilizing linear mixed oligopoly model, this paper explores the magnitude of the maximum‐revenue tariff, optimum‐welfare tariff, and revenue‐constrained optimal tariff that is especially designed for the consideration of the bureaucratic inefficiency. In particular, the tariff ranking issue is examined under both cases of Cournot competition and domestic public leadership. We found that, under Cournot competition, the optimum‐welfare tariff is the highest and it is followed by the revenue‐constrained optimal tariff while the maximum‐revenue tariff is the lowest. But, under Stackelberg public leadership, if the domestic private firms are fewer than the foreign firms, the maximum‐revenue tariff becomes the highest and the optimum‐welfare exceeds the revenue‐constrained optimal tariff.

A note on two-part pricing under uncertainty

In his classic article, Walter Oi (Oi, Q. J. Econ. 2005; 85: 77–96) analyzed the optimal structure of a two-part tariff. He showed that identical consumer demands result in user fees equal to marginal cost and a lump-sum entry fee equal to the consumer surplus that marginal cost pricing generates. This result appears in managerial economics texts (Managerial Economics (6th edn). W. W. Norton: New York; 472–475; Managerial Economics and Business Strategy (5th edn). McGraw Hill/Irwin: New York; 410–412) and intermediate microeconomics texts (Intermediate Microeconomics (6th edn). W. W. Norton: New York; 451–453). In this note, we extend Oi’s analysis to the case of uncertainty. We show that attitudes toward risk influence the optimal two-part tariff. The results from our model describe the two-part tariff that emerges from expected utility maximization. Copyright r 2010 John Wiley & Sons, Ltd.

Electricity Network Tariff Architectures A Comparison of Four OECD Countries

The study is motivated by the question “what is the optimal tariff design?” While we do not offer an answer to this question, we use the different designs in four select countries to illuminate the issues involved in designing electricity network tariffs. Electricity networks are a resource shared by all network users. A tariff design that is clear to network users and well understood by them can help them make efficient decisions. A design that sets up conflicting or perverse incentives results in economic distortions. We find that there are a variety of choices and trade-offs while designing the electricity network tariffs for any electricity system. The tariff design must not only be influenced by the technical and economic characteristics of the system, but also the secondary policy objectives that policy makers wish to achieve, while allowing network companies to recover the costs of building and maintaining the network.

Strategic tariffs, tariff jumping, and heterogeneous firms

The majority of research to date investigating strategic tariffs in the presence of multinationals finds a knife-edge result where, in equilibrium, all foreign firms are either multinationals or exporters. Utilizing a model of heterogeneous firms, we find equilibria in which both pure exporters and multinationals coexist. We utilize this model to study the case of endogenously chosen tariffs. As is standard, Nash equilibrium tariffs are higher than the socially optimal tariffs. Unlike existing models with homogeneous firms, we find that non-cooperative tariffs promote the existence of low-productivity firms relative to the socially optimal tariffs. This highlights a new source of inefficiency from tariff competition not found in models of homogeneous firms. In addition, we find that in many cases the Nash equilibrium tariff when FDI is a potential firm structure is lower than when it is not. As a result, FDI improves welfare by mitigating tariff competition.

Split Decisions in Antidumping Cases

Abstract This paper provides a rationale for “split decisions” in antidumping cases. A split decision occurs when the U.S. government simultaneously investigates multiple countries for dumping the same product but imposes antidumping duties on only a subset of these countries. In the U.S., 76% of antidumping petitions filed between 1980 and 2004 involved two or more countries accused of dumping the same product. Among these multi-country investigations, roughly 30% concluded with a split decision in the final stage of an investigation. The model in this paper shows that selectively applying antidumping duties against foreign countries that are selling increased quantities of imports at a price below long run average total cost improves the importing country's welfare. Imperfectly competitive firms in different countries face stochastic demand and are subject to capacity constraints. As a result, foreign firms dump when they face weak demand in their own markets. In response to the shift in a foreign country's export supply, the importing country's optimal rent-shifting tariff against the foreign country with weak demand increases while its optimal tariff against other countries falls. This paper suggests an economic rationale behind the differential treatment afforded to different countries accused of dumping.

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.