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Optimal tariffs, retaliation, and the welfare loss from tariff wars in the Melitz model

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  • Felbermayr, Gabriel
  • Jung, Benjamin
  • Larch, Mario

Abstract

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 Rodríguez-Clare (JIE, 2009) and the homogeneous firms framework of Gros (JIE, 1987). The optimal tariff internalizes a mark-up distortion, an entry distortion, and a terms‐of-trade externality. It is larger when the dispersion of firm-level productivities is higher, and the country's relative size or relative average productivity is bigger. 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, and higher firm-level productivity dispersion increase 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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 89 (2013)
Issue (Month): 1 ()
Pages: 13-25

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Handle: RePEc:eee:inecon:v:89:y:2013:i:1:p:13-25

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Optimal tariffs; Tariff wars; Heterogeneous firms; World Trade Organization;

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Citations

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Cited by:
  1. Jung, Benjamin & Felbermayr, Gabriel & Larch, Mario, 2013. "Icebergs versus Tariffs: A Quantitative Perspective on the Gains from Trade," Munich Reprints in Economics 19542, University of Munich, Department of Economics.
  2. Fabrice Defever & Alejandro Riaño, 2013. "China's Pure Exporter Subsidies," FIW Working Paper series 121, FIW.
  3. Gabriel Felbermayr & Mario Larch & Lechthaler Wolfgang, 2011. "Endogenous Labor Market Insitutions in an Open Economy," Ifo Working Paper Series Ifo Working Paper No. 108, Ifo Institute for Economic Research at the University of Munich.
  4. Felbermayr, Gabriel & Jung, Benjamin, 2012. "Unilateral trade liberalization in the melitz model: A note," Munich Reprints in Economics 20572, University of Munich, Department of Economics.
  5. Mario Larch , & Wolfgang Lechthaler, 2011. "Whom to Send to Doha? The Shortsighted Ones!," Kiel Working Papers 1695, Kiel Institute for the World Economy.
  6. Segerstrom, Paul & Sugita, Yoichi, 2014. "The Impact of Trade Liberalization on Industrial Productivity," CEPR Discussion Papers 9952, C.E.P.R. Discussion Papers.
  7. Gabriel J. Felbermayr & Benjamin Jung, 2011. "Home Market Effects and the Single-Sector Melitz Model," CESifo Working Paper Series 3695, CESifo Group Munich.
  8. Costinot, Arnaud & Donaldson, Dave & Vogel, Jonathan & Werning, Iván, 2013. "Comparative Advantage and Optimal Trade Policy," CEPR Discussion Papers 9765, C.E.P.R. Discussion Papers.
  9. Jasmin Gröschl, 2012. "Neuer Protektionismus – Gefahren für den Freihandel," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 65(15), pages 35-39, 08.
  10. Hübler, Michael & Pothen, Frank, 2013. "The optimal tariff in the presence of trade-induced productivity gains," ZEW Discussion Papers 13-103, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  11. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2012. "Tariffs and welfare in new trade theory models," University of Tuebingen Working Papers in Economics and Finance 41, University of Tuebingen, Faculty of Economics and Social Sciences.

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