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A larger country sets a lower optimal tariff

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  • Takumi Naito

Abstract

We develop a new optimal tariff theory that 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 direct revenue, indirect revenue, and growth effects. Based on this welfare decomposition, we obtain two main results. First, the optimal tariff of a country is positive. Second, the optimal tariff of a country is likely to be decreasing in its absolute advantage parameter, implying that a larger (i.e., more technologically advanced) country sets a lower optimal tariff.

Suggested Citation

  • Takumi Naito, 2019. "A larger country sets a lower optimal tariff," Review of International Economics, Wiley Blackwell, vol. 27(2), pages 643-665, May.
    • Handle: RePEc:bla:reviec:v:27:y:2019:i:2:p:643-665
    DOI: 10.1111/roie.12391
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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. Tomohiro ARA, 2021. "Optimal Tariffs in the Melitz Model: A sufficient statistics approach for trade policy," 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. Difei Geng & Kamal Saggi, 2023. "Tariff barriers and the protection of intellectual property in the global economy," World Scientific Book Chapters, in: Kamal Saggi (ed.), Technology Transfer, Foreign Direct Investment, and the Protection of Intellectual Property in the Global Economy, chapter 27, pages 617-635, World Scientific Publishing Co. Pte. Ltd..

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