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Trade-induced productivity gains reduce incentives to impose strategic tariffs

Michael Hübler and Frank Pothen

Economic Modelling, 2017, vol. 61, issue C, 420-431

Abstract: Strategic tariffs, which raise an economy's welfare by restricting trade and improving the terms of trade, can create an obstacle to free trade. We evaluate how far trade-induced productivity gains (technology spillovers) reduce or remove this obstacle, because more intensive trade enhances these potential gains. Based on theory and the World Input-Output Database (WIOD) we estimate stronger import-induced than export-induced productivity gains. We feed the theory and the estimates into a global Computable General Equilibrium (CGE) model calibrated to WIOD. We find that the USA's, China's and the EU's optimal tariffs are reduced by less than 20%, Russia's and India's by around 25% and Brazil's by 40% when taking endogenous trade-induced productivity gains into account. Nonetheless, incentives for single economies to impose strategic tariffs persist. Particularly large, trade-intensive downstream sectors producing distinct goods incentivize high sectoral optimal tariffs. A global free trade agreement could overcome such incentives and maximize the trade-induced productivity gains.

Keywords: Trade policy; Optimal tariff; Technology spillovers; Emerging economies; CGE (search for similar items in EconPapers)
JEL-codes: F12 F14 F17 O33 O40 (search for similar items in EconPapers)
Date: 2017
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