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Optimal Tariffs: The Evidence

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  • Christian Broda
  • Nuno Limão
  • David Weinstein

Abstract

The theoretical debate over whether countries can and should set tariffs in response to the foreign export elasticities they face goes back to Edgeworth (1894). Despite the centrality of the optimal tariff argument in trade policy, there exists no evidence about whether countries actually exploit their market power in trade by setting higher tariffs on goods that are supplied inelastically. We estimate disaggregate foreign export supply elasticities and find evidence that countries that are not members of the World Trade Organization systematically set higher tariffs on goods that are supplied inelastically. The typical country in our sample sets tariffs 9 percentage points higher in goods with high market power relative to those with low market power. This large effect is of a magnitude similar to the average tariffs in the data and market power explains more of the tariff variation than a commonly used political economy variable. The result is robust to the inclusion of other determinants of tariffs and a variety of model specifications. We also find that U.S. trade restrictions that are not covered by the WTO are significantly higher in goods where the U.S. has more market power. In short, we find strong evidence that these importers have market power and use it in setting non-cooperative trade policy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12033.

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Date of creation: Feb 2006
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Handle: RePEc:nbr:nberwo:12033

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Cited by:
  1. Kyle Bagwell, 2009. "Self-Enforcing Trade Agreements and Private Information," NBER Working Papers 14812, National Bureau of Economic Research, Inc.
  2. Itai Agur, 2007. "The US Trade Deficit, the Decline of the WTO and the Rise of Regionalism," Economics Working Papers ECO2007/17, European University Institute.
  3. 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.
  4. Pol Antràs & Gerard Padró i Miquel, 2008. "Foreign Influence and Welfare," NBER Working Papers 14129, National Bureau of Economic Research, Inc.
  5. Paola Conconi & Giovanni Facchini & Maurizio Zanardi, 2012. "Fast-Track Authority and International Trade Negotiations," ULB Institutional Repository 2013/137521, ULB -- Universite Libre de Bruxelles.
  6. Limao, Nuno & Panagariya, Arvind, 2007. "Inequality and endogenous trade policy outcomes," Journal of International Economics, Elsevier, vol. 72(2), pages 292-309, July.
  7. Bouet, Antoine & Laborde Debucquet, David, 2010. "Economics of export taxation in a context of food crisis," IFPRI discussion papers 994, International Food Policy Research Institute (IFPRI).
  8. Francis Bloch & Ben Zissimos, 2008. "Optimum Tariffs and Retaliation: How Country Numbers Matter," Vanderbilt University Department of Economics Working Papers 0802, Vanderbilt University Department of Economics.

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