A Larger Country Sets a Lower Optimal Tariff

         
Author Name NAITO Takumi (Vanderbilt University / Waseda University)
Creation Date/NO. March 2017 17-E-037
Research Project Analyses of Trade Costs
Download / Links

Abstract

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.