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Endogenous Tariff Formation with Intra-Industry Trade

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  • Pao-Li Chang

    (University of Michigan)

Abstract

Previous theoretical contributions on endogenous tariff formation have focused on trade mod-els with homogeneous goods and constant returns to scale. This paper investigates the political equilibrium of trade policy when economic structure is instead characterized by differentiated products and increasing returns to scale and there exists intra-industry trade. The result shows that endogenous tariffs are positive for all industries with non-negligible shares of world pro-duction. However, the level of protection is less than the optimal tariff that would otherwise be imposed by a benevolent government in an unorganized industry, and higher in an organized industry. The protection provided to all unorganized (organized) industries increases (falls) with the relative weight the government attaches to aggregate welfare vis-` a-vis campaign contribu-tions and falls with the fraction of the population that belongs to a lobby group. The model also indicates that the endogenous tariff level in an organized industry might be explosive. The higher is the fraction of the population represented by a lobby and the higher is the weight on aggregate welfare in the government’s objective function, the smaller is the possibility for such an explosive tariff.

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File URL: http://fordschool.umich.edu/rsie/workingpapers/Papers476-500/r476.pdf
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Bibliographic Info

Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 476.

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Length: 23 Pages
Date of creation: 2002
Date of revision:
Handle: RePEc:mie:wpaper:476

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Postal: ANN ARBOR MICHIGAN 48109
Web page: http://www.fordschool.umich.edu/rsie/
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Keywords: endogenous tariff; intra-industry trade;

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  1. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-85, December.
  2. Grossman, Gene & Helpman, Elhanan, 1993. "Protection for Sale," CEPR Discussion Papers 827, C.E.P.R. Discussion Papers.
  3. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  4. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, vol. 22(1-2), pages 79-102, February.
  5. Jones, Ronald W., 1975. "Income distribution and effective protection in a multicommodity trade model," Journal of Economic Theory, Elsevier, vol. 11(1), pages 1-15, August.
  6. Hillman, Arye L, 1982. "Declining Industries and Political-Support Protectionist Motives," American Economic Review, American Economic Association, vol. 72(5), pages 1180-87, December.
  7. Krugman, Paul R, 1981. "Intraindustry Specialization and the Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 959-73, October.
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