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A welfare ranking of multilateral reductions in real and tariff trade barriers when firms are heterogenous

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Author Info

  • Philipp J.H. Schröder

    (Department of Economics and Business, Aarhus University, Denmark)

  • Allan Sørensen

    ()
    (Department of Economics and Business, Aarhus University, Denmark)

Abstract

Trade liberalization comes about through reductions in various types of trade costs. This paper introduces, apart from real variable (i.e. iceberg) and fixed export costs, two partially redistributed tariffs into a Melitz (2003) model. We present comparable results for welfare effects and changes in industry structure by analyzing the different liberalization channels for an equal effect on openness. The welfare ranking is sensitive to the degree of efficiency in tariff redistribution, e.g. the share of tariff revenues wasted on rent-seeking activities. Ad valorem tariff cuts switch from the least to the most preferred mode of liberalization as the fraction of tariffs wasted moves from zero to unity. Apart from a situation with no tariff redistribution, reductions in iceberg trade costs are preferred to reductions in real fixed trade costs which again are preferred to cuts in unit tariffs.

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File URL: ftp://ftp.econ.au.dk/afn/wp/11/wp11_18.pdf
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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2011-18.

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Length: 18
Date of creation: 20 Dec 2011
Date of revision:
Handle: RePEc:aah:aarhec:2011-18

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Real Trade Costs; Non-Tariff Barriers; Tariffs; Frictional Trade Costs; Iceberg Costs; Integration;

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Cited by:
  1. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2013. "Icebergs versus tariffs: A quantitative perspective on the gains from trade," University of Tuebingen Working Papers in Economics and Finance 53, University of Tuebingen, Faculty of Economics and Social Sciences.
  2. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2013. "Optimal tariffs, retaliation, and the welfare loss from tariff wars in the Melitz model," Journal of International Economics, Elsevier, vol. 89(1), pages 13-25.

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