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Endogenous Tariffs in the Presence of Multinationals

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Author Info
Mario Larch

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Abstract

This paper analyzes the effect of the presence of multinational firms on endogenous tariff rates, using an analytically solvable two-country model with fixed terms of trade. Noncooperative tariffs are lower in the presence of market-seeking (horizontal) foreign direct investment (FDI). Such firms avoid trade and entail a loss of tariff revenues for importing countries. In the case of low-cost-seeking (vertical) FDI, the results are less clear-cut and the noncooperative tariff rate can turn out to be a subsidy. The world-welfare-maximizing policy is an import subsidy.

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Publisher Info
Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 164 (2008)
Issue (Month): 3 (September)
Pages: 534-567
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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200809)164:3_534:etitpo_2.0.tx_2-a

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Related research
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Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

Cited by:
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  1. Matthew T Cole & Ronald B Davies, 2009. "Optimal Tariffs, Tariff Jumping, and Heterogeneous Firms," Working Papers 200919, School Of Economics, University College Dublin. [Downloadable!]
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