Optimal Tariffs: The Evidence

Christian Broda, Nuno Limão and David Weinstein

No 12033, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The theoretical debate over whether countries can and should set tariffs in response to the foreign export elasticities they face goes back to Edgeworth (1894). Despite the centrality of the optimal tariff argument in trade policy, there exists no evidence about whether countries actually exploit their market power in trade by setting higher tariffs on goods that are supplied inelastically. We estimate disaggregate foreign export supply 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 typical country in our sample sets tariffs 9 percentage points higher in goods with high market power relative to those with low market power. This large effect is of a magnitude similar to the average tariffs in the data and market power explains more of the tariff variation than a commonly used political economy variable. The result is robust to the inclusion of other determinants of tariffs and a variety of model specifications. We also find that U.S. trade restrictions that are not covered by the WTO are significantly higher in goods where the U.S. has more market power. In short, we find strong evidence that these importers have market power and use it in setting non-cooperative trade policy.

JEL-codes: F13 F14 H21 (search for similar items in EconPapers)
Date: 2006-02
New Economics Papers: this item is included in nep-int, nep-mic and nep-pbe
Note: ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published as Broda, Christian, Nuno Limão, and David Weinstein. “Optimal Tariffs and Market Power: The Evidence.” American Economic Review 98, 5 (December 2008): 2032-65.

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Working Paper: Optimal Tariffs: The Evidence (2006)
Working Paper: Optimal Tariffs: The Evidence (2006)
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