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Optimal Tariffs, Tariff Jumping, and Heterogeneous Firms

  • Matthew T Cole

    (University College Dublin)

  • Ronald B Davies

    (University College Dublin)

The majority of research to date investigating strategic tariffs in the presence of multinationals finds a knife-edge result where, in equilibrium, all foreign firms are either multinationals or exporters. Utilizing a model of heterogeneous firms, we find equilibria in which both pure exporters and multinationals coexist. We utilize this model to study the case of endogenously chosen tariffs. As is standard, Nash equilibrium tariffs are higher than the socially optimal tariffs. Unlike existing models with homogeneous firms, we find that non-cooperative tariffs promote the existence of low-productivity firms relative to the socially optimal tariffs. This highlights a new source of inefficiency from tariff competition not found in models of homogeneous firms. In addition, we find that in many cases the Nash equilibrium tariff when FDI is a potential firm structure is lower than when it is not. As a result, FDI improves welfare by mitigating tariff competition.

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File URL: http://www.ucd.ie/t4cms/wp09.19.pdf
File Function: First version, 2009
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Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200919.

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Length: 36 pages
Date of creation: 01 Oct 2009
Date of revision:
Handle: RePEc:ucn:wpaper:200919
Contact details of provider: Postal: UCD, Belfield, Dublin 4
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Web page: http://www.ucd.ie/economics

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  1. Sébastien Jean, 2002. "International Trade and Firms' Heterogeneity under Monopolistic Competition," Open Economies Review, Springer, vol. 13(3), pages 291-311, July.
  2. Chor, Davin, 2009. "Subsidies for FDI: Implications from a model with heterogeneous firms," Journal of International Economics, Elsevier, vol. 78(1), pages 113-125, June.
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  8. Jørgensen, Jan G. & Schröder, Philipp J.H., 2008. "Fixed export cost heterogeneity, trade and welfare," European Economic Review, Elsevier, vol. 52(7), pages 1256-1274, October.
  9. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
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  11. Beata Smarzynska Javorcik, 2004. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages," American Economic Review, American Economic Association, vol. 94(3), pages 605-627, June.
  12. Jan G. Jorgensen & Philipp J. H. Schröder, 2005. "Tariffs and Firm-Level Heterogeneous Fixed Export Costs," Discussion Papers of DIW Berlin 496, DIW Berlin, German Institute for Economic Research.
  13. Blonigen, Bruce A & Figlio, David N, 1998. "Voting for Protection: Does Direct Foreign Investment Influence Legislator Behavior?," American Economic Review, American Economic Association, vol. 88(4), pages 1002-14, September.
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  16. Markusen, James R & Maskus, Keith E, 2002. "Discriminating among Alternative Theories of the Multinational Enterprise," Review of International Economics, Wiley Blackwell, vol. 10(4), pages 694-707, November.
  17. Blanchard, Emily J., 2010. "Reevaluating the role of trade agreements: Does investment globalization make the WTO obsolete?," Journal of International Economics, Elsevier, vol. 82(1), pages 63-72, September.
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  19. Haaland, Jan I. & Wooton, Ian, 1996. "Anti-dumping jumping: Reciprocal anti-dumping and industrial location," Discussion Papers, Series II 310, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
  20. Blanchard Emily J, 2007. "Foreign Direct Investment, Endogenous Tariffs, and Preferential Trade Agreements," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-52, November.
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  22. Bruce A. Blonigen & KaSaundra Tomlin & Wesley W. Wilson, 2001. "Tariff-jumping FDI and Domestic Firms’ Profits," University of Oregon Economics Department Working Papers 2002-5, University of Oregon Economics Department, revised 01 Jun 2002.
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