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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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