The Optimal Tariff in the Presence of Trade-Induced Productivity Gains

40 Pages Posted: 29 Nov 2013

See all articles by Michael Hübler

Michael Hübler

Leibniz Universität Hannover

Frank Pothen

Fraunhofer Gesellschaft - Fraunhofer Center for International Management and Knowledge Economy IMW

Date Written: November 21, 2013

Abstract

We scrutinize the impact of international productivity gains (spillovers) induced by imports and exports on optimal tariffs. First, we solve a stylized 2x2 trade model of a large open economy and show that (a) productivity gains via exports and imports both reduce the strategically optimal tariff, (b) there exists a certain strength of productivity gains such that the incentive to manipulate the terms of trade strategically vanishes, (c) the welfare gain that can be achieved via a tariff is lower in the presence of productivity gains than in their absence, and (d) these results even hold without power on international markets. Second, we apply this model to a panel data set covering 40 countries, 29 sectors and the years 1995 to 2009. We find that import-driven productivity gains are stronger than export-driven productivity gains. Third, we extend our 2x2 model to a multi-region, multi-sector model that we calibrate to the data set used in the econometric analysis and to the econometrically estimated productivity gains. Optimal tariffs are reduced by 17% for the US and China and 40% for Brazil when taking trade-induced productivity gains into account. The USA are the only model region that gains from European optimal tariff policy. Thus, trade-induced productivity gains have empirically relevant effects on optimal tariffs.

Keywords: trade, optimal tariff, productivity gains, technology spillovers

JEL Classification: F12, F14, F17, O33, O40

Suggested Citation

Hübler, Michael and Pothen, Frank, The Optimal Tariff in the Presence of Trade-Induced Productivity Gains (November 21, 2013). ZEW - Centre for European Economic Research Discussion Paper No. 13-103, Available at SSRN: https://ssrn.com/abstract=2360544 or http://dx.doi.org/10.2139/ssrn.2360544

Michael Hübler (Contact Author)

Leibniz Universität Hannover ( email )

Institute f. Environm. Economics and World Trade
Koenigsworther Platz 1
30167 Hannover, DE 30167
Germany

Frank Pothen

Fraunhofer Gesellschaft - Fraunhofer Center for International Management and Knowledge Economy IMW ( email )

Neumarkt 9-19
Leipzig, Saxony 04109
Germany

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