The Optimal Tariff in the Presence of Trade-Induced Productivity Gains

We scrutinize the impact of international productivity gains (spillovers) induced by imports and exports on optimal tariffs. Our research question reads: how do trade-induced international productivity gains influence the choice of the optimal tariff? Trade-induced international technology spillovers (productivity gains) are implemented in a Computable General Equilibrium (CGE) model in GAMS that uses the novel global WIOD data set. The CGE implementation is backed up by a stylized theoretical model, and the strength of productivity spillovers is econometrically estimated by using the WIOD data. First, we show theoretically that (a) productivity gains via exports and imports both reduce the strategically optimal tariff, (b) there exists a certain strength of productivity gains such that the incentive to manipulate the terms of trade strategically vanishes, (c) the welfare gain that can be achieved via a tariff is lower in the presence of productivity gains than in their absence, and (d) these results even hold without power on international markets. Second, we estimate econometrically that import-driven productivity gains are stronger than export-driven productivity gains. Third, we find numerically that optimal tariffs are reduced by 1% for the USA and China and 40% for Brazil when taking trade-induced productivity gains into account. The USA are the only model region that gains from European optimal tariff policy. Overall, we show that trade-induced productivity gains have empirically relevant effects on optimal tariffs.