Tariff Wars in the Ricardian Model with a Continuum of Goods
Marcus M. Opp
University of California, Berkeley - Finance Group
August 19, 2009
Journal of International Economics, Vol. 80, No. 2, pp. 212-225, 2010
This paper describes strategic tariff choices within the Ricardian framework of Dornbusch-Fischer-Samuelson (1977) using CES preferences. The optimum tariff schedule is uniform across goods and inversely related to the import demand elasticity of the other country. In the Nash equilibrium of tariffs, larger economies apply higher tariff rates. Productivity adjusted relative size (≈GDP ratio) is a sufficient statistic for absolute productivity advantage and the size of the labor force. Both countries apply higher tariff rates if specialization gains from comparative advantage are high and transportation cost are low. A sufficiently large economy prefers the inefficient Nash equilibrium in tariffs over free trade due to its quasi-monopolistic power on world markets. The required threshold size is increasing in comparative advantage and decreasing in transportation cost. I discuss the implications of the static Nash equilibrium analysis for the sustainability and structure of trade agreements.
Number of Pages in PDF File: 14
Keywords: Optimum tariff rates, Ricardian trade models, WTO, Gains from trade
JEL Classification: C72, F11, F13Accepted Paper Series
Date posted: January 24, 2010 ; Last revised: August 24, 2010
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