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A Larger Country Sets a Lower Optimal Tariff

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  • NAITO Takumi

Abstract

We develop a new optimal tariff theory which is consistent with the fact that a larger country sets a lower tariff. In our dynamic Dornbusch-Fischer-Samuelson Ricardian model, the long-run welfare effects of a rise in a country's tariff consist of the revenue, distortionary, and growth effects. Based on this welfare decomposition, we obtain two main results. First, the optimal tariff of a country is positive. Second, a country's marginal net benefit of deviating from free trade is usually decreasing in its absolute advantage parameter, implying that a larger (i.e., more technologically advanced) country sets a lower optimal tariff.

Suggested Citation

  • NAITO Takumi, 2017. "A Larger Country Sets a Lower Optimal Tariff," Discussion papers 17037, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:17037
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    References listed on IDEAS

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    Cited by:

    1. Naito, Takumi, 2022. "Does a larger country set a higher optimal tariff with monopolistic competition and capital accumulation?," Economics Letters, Elsevier, vol. 216(C).
    2. ARA Tomohiro, 2021. "Competition, Productivity and Trade, Reconsidered," Discussion papers 21032, Research Institute of Economy, Trade and Industry (RIETI).
    3. Hajime Takatsuka & Dao‐Zhi Zeng, 2022. "Mobile capital, optimal tariff, and tariff war," Review of International Economics, Wiley Blackwell, vol. 30(1), pages 166-204, February.
    4. Tatsuro Iwaisako & Hitoshi Tanaka, 2020. "Tariffs and Foreign Direct Investment in a North South Product Cycle Model," Discussion Papers in Economics and Business 20-08, Osaka University, Graduate School of Economics.
    5. Geng, Difei & Saggi, Kamal, 2022. "Tariff barriers and the protection of intellectual property in the global economy," European Economic Review, Elsevier, vol. 144(C).

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