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Tariff strategies and small open economies

  • Pascalis Raimondos-Møller

    (Copenhagen Business School)

  • Alan D. Woodland

    (University of Sidney)

This paper examines the issue of optimal tariffs for a small economy that trades with a large economy. We define `small' and `large' in the sense that the world prices are determined solely by the large country and, therefore, the small country faces exogenously given world prices. Within this framework it is shown that the small country has an incentive to behave as a Stackelberg leader by committing itself to a non-zero optimal tariff. Although the small country is unable to directly affect world prices, by pre-committing to a non-zero trade tax it induces a reduction of the large country's optimal trade tax, thereby indirectly improving its terms of trade and welfare.

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Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 1997-23.

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Length: 22 pages
Date of creation: Dec 1997
Date of revision:
Publication status: Published in: Canadian Journal of Economics. February 2000; 33(1): 25-40
Handle: RePEc:kud:kuieci:1997-23
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