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Optimal Tariffs: The Evidence

  • Christian Broda
  • N. Limao
  • D. Weinstein

    ()

    (Columbia University)

The theoretical debate over whether countries can and should set tariffs in response to export elasticities goes back over a century to the writings of Edgeworth (1894) and Bickerdike (1907). Despite the optimal tariff argument's centrality in debates over trade policy, there exists no evidence about whether countries actually apply it when setting tariffs. We estimate disaggregate export elasticities and find evidence that countries that are not members of the World Trade Organization systematically set higher tariffs on goods that are supplied inelastically. The result is robust to the inclusion of political economy variables and a variety of model specifications. Moreover, we find that countries with higher aggregate market power have on average higher tariffs. In short, we find strong evidence in favor of the optimal tariff argument

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 381.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:381
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  1. Kyle Bagwell & Robert W. Staiger, 1997. "An Economic Theory of GATT," NBER Working Papers 6049, National Bureau of Economic Research, Inc.
  2. Pinelopi Koujianou Goldbe & Giovanni Maggi, 1997. "Protection for Sale: An Empirical Investigation," NBER Working Papers 5942, National Bureau of Economic Research, Inc.
  3. Markusen, James R & Wigle, Randall M, 1989. "Nash Equilibrium Tariffs for the United States and Canada: The Roles of Country Size, Scale Economies, and Capital Mobility," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 368-86, April.
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  5. Limao, Nuno & Venables, Anthony J., 1999. "Infrastructure, geographical disadvantage, and transport costs," Policy Research Working Paper Series 2257, The World Bank.
  6. David Weinstein & Christian Broda, 2004. "Globalization and the Gains from Variety," 2004 Meeting Papers 530, Society for Economic Dynamics.
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  8. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Boston College Working Papers in Economics 593, Boston College Department of Economics.
  9. Rodrik, Dani, 1995. "Political economy of trade policy," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 28, pages 1457-1494 Elsevier.
  10. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-77, March.
  11. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  12. Chang, Won & Winters, L. Alan, 1999. "How Regional Blocs Affect Excluded Countries: The Price Effects of MERCOSUR," CEPR Discussion Papers 2179, C.E.P.R. Discussion Papers.
  13. Bruce E. Hansen, 1996. "Sample Splitting and Threshold Estimation," Boston College Working Papers in Economics 319., Boston College Department of Economics, revised 12 May 1998.
  14. Allan Drazen & Nuno Limão, 2004. "Government Gains from Self-Restraint: A Bargaining Theory of Inefficient Redistribution," NBER Working Papers 10375, National Bureau of Economic Research, Inc.
  15. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
  16. Fernando Alvarez & Robert E. Lucas, 2005. "General Equilibrium Analysis of the Eaton-Kortum Model of International Trade," NBER Working Papers 11764, National Bureau of Economic Research, Inc.
  17. Gros, Daniel, 1987. "A note on the optimal tariff, retaliation and the welfare loss from tariff wars in a framework with intra-industry trade," Journal of International Economics, Elsevier, vol. 23(3-4), pages 357-367, November.
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