The Effects of Trade-Balance-Triggered Tariffs

Grant W Gardner and Kent P Kimbrough

International Economic Review, 1990, vol. 31, issue 1, 117-29

Abstract: An intertemporal optimizing model of a small open economy is used to study the effects on the dynamics of real interest rates, consumption, and the trade balance of a policy where tariffs are regularly enacted in response to trade balance difficulties. Starting from a free trade equilibrium characterized by trade balance deficits during recessions and surpluses during booms, it is shown that trade-balance-triggered tariffs improve the trade balance during recessions and worsen it during booms. This result is due to the policy's intertemporal substitution effects. The implications of investment spending for the effects of trade-balance-triggered tariffs are also discussed. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1990
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