Optimal Tariffs: The Evidence
Christian M. Broda
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
University of Maryland - Department of Economics
David E. Weinstein
Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)
CEPR Discussion Paper No. 5540
The theoretical debate over whether countries can and should set tariffs in response to export elasticities goes back over a century to the writings of Edgeworth (1894) and Bickerdike (1907). Despite the optimal tariff argument's centrality in debates over trade policy, there exists no evidence about whether countries actually apply it when setting tariffs. We estimate disaggregate export 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 result is robust to the inclusion of political economy variables and a variety of model specifications. Moreover, we find that countries with higher aggregate market power have on average higher tariffs. In short, we find strong evidence in favour of the optimal tariff argument.
Number of Pages in PDF File: 43
Keywords: WTO, GATT, international trade, optimal tariffs, trade policy
JEL Classification: F13, F14, H21working papers series
Date posted: June 15, 2006
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