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Endogenous Tariff Formation with Intra-Industry Trade

Author

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  • Pao-Li Chang

    (University of Michigan)

Abstract

Previous theoretical contributions on endogenous tariff formation have focused on trade mod-els with homogeneous goods and constant returns to scale. This paper investigates the political equilibrium of trade policy when economic structure is instead characterized by differentiated products and increasing returns to scale and there exists intra-industry trade. The result shows that endogenous tariffs are positive for all industries with non-negligible shares of world pro-duction. However, the level of protection is less than the optimal tariff that would otherwise be imposed by a benevolent government in an unorganized industry, and higher in an organized industry. The protection provided to all unorganized (organized) industries increases (falls) with the relative weight the government attaches to aggregate welfare vis-` a-vis campaign contribu-tions and falls with the fraction of the population that belongs to a lobby group. The model also indicates that the endogenous tariff level in an organized industry might be explosive. The higher is the fraction of the population represented by a lobby and the higher is the weight on aggregate welfare in the government’s objective function, the smaller is the possibility for such an explosive tariff.

Suggested Citation

  • Pao-Li Chang, 2002. "Endogenous Tariff Formation with Intra-Industry Trade," Working Papers 476, Research Seminar in International Economics, University of Michigan.
  • Handle: RePEc:mie:wpaper:476
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    File URL: http://fordschool.umich.edu/rsie/workingpapers/Papers476-500/r476.pdf
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    References listed on IDEAS

    as
    1. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, pages 833-850.
    2. Hillman, Arye L, 1982. "Declining Industries and Political-Support Protectionist Motives," American Economic Review, American Economic Association, pages 1180-1187.
    3. Magee,Stephen P. & Brock,William A. & Young,Leslie, 1989. "Black Hole Tariffs and Endogenous Policy Theory," Cambridge Books, Cambridge University Press, number 9780521377003, November.
    4. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, pages 297-308.
    5. Jones, Ronald W., 1975. "Income distribution and effective protection in a multicommodity trade model," Journal of Economic Theory, Elsevier, vol. 11(1), pages 1-15, August.
    6. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, pages 79-102.
    7. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, pages 970-985.
    8. Krugman, Paul R, 1981. "Intraindustry Specialization and the Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 959-973, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    endogenous tariff; intra-industry trade;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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