A Larger Country Sets a Lower Optimal Tariff

We develop a new optimal tariff theory which is consistent with the fact that a larger country sets a lower tariff. In our dynamic Dornbusch-Fischer-Samuelson Ricardian model, the long-run welfare effects of a rise in a country's tariff consist of the revenue, distortionary, and growth effects. Based on this welfare decomposition, we obtain two main results. First, the optimal tariff of a country is positive. Second, a country's marginal net benefit of deviating from free trade is usually decreasing in its absolute advantage parameter, implying that a larger (i.e., more technologically advanced) country sets a lower optimal tariff.

Published: Naito, Takumi, 2019. "A larger country sets a lower optimal tariff," Review of International Economics, Vol. 27(2), pp. 643-665.
https://onlinelibrary.wiley.com/doi/full/10.1111/roie.12391