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Trade imbalance and the endogenous optimal tariff

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  • Chuantian He
  • Chunding Li
  • Chuangwei Lin

Abstract

Endogenous tariff literatures reveal empirically that trade imbalance is negatively related with import tariff, this article gives a theoretical evidence and explanation to support this finding with the methodology of multi-country numerical general equilibrium modelling and simulation. We explore how optimal tariff changes after trade imbalance is introduced, and find that optimal tariffs decrease substantially, either for surplus or deficit countries, when imbalance is considered. Specifically, when the imbalance is modelled in endogenous monetary and inside-money structures, the optimal tariffs decrease by 26% globally on average. Our results suggest that the deepening trade imbalance is beneficial to the global trade liberalization due to its driving tariffs down.

Suggested Citation

  • Chuantian He & Chunding Li & Chuangwei Lin, 2019. "Trade imbalance and the endogenous optimal tariff," Applied Economics, Taylor & Francis Journals, vol. 51(10), pages 1040-1051, February.
    • Handle: RePEc:taf:applec:v:51:y:2019:i:10:p:1040-1051
    DOI: 10.1080/00036846.2018.1524974
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