A Larger Country Sets a Lower Optimal Tariff

Takumi Naito

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

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.

Pages: 20 pages
Date: 2017-03
New Economics Papers: this item is included in nep-int
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Journal Article: A larger country sets a lower optimal tariff (2019)
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