Optimal Tariffs: The Evidence

58 Pages Posted: 4 May 2006 Last revised: 2 Jul 2009

See all articles by Christian M. Broda

Christian M. Broda

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Nuno Limão

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)

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Date Written: February 2006

Abstract

The theoretical debate over whether countries can and should set tariffs in response to the foreign export elasticities they face goes back to Edgeworth (1894). Despite the centrality of the optimal tariff argument in trade policy, there exists no evidence about whether countries actually exploit their market power in trade by setting higher tariffs on goods that are supplied inelastically. We estimate disaggregate foreign export supply 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 typical country in our sample sets tariffs 9 percentage points higher in goods with high market power relative to those with low market power. This large effect is of a magnitude similar to the average tariffs in the data and market power explains more of the tariff variation than a commonly used political economy variable. The result is robust to the inclusion of other determinants of tariffs and a variety of model specifications. We also find that U.S. trade restrictions that are not covered by the WTO are significantly higher in goods where the U.S. has more market power. In short, we find strong evidence that these importers have market power and use it in setting non-cooperative trade policy.

Suggested Citation

Broda, Christian M. and Limão, Nuno and Weinstein, David E., Optimal Tariffs: The Evidence (February 2006). NBER Working Paper No. w12033. Available at SSRN: https://ssrn.com/abstract=883082

Christian M. Broda

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Nuno Limão

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-7842 (Phone)
301-405 3542 (Fax)

David E. Weinstein (Contact Author)

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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MC 3308
New York, NY 10027
United States
212-854-6880 (Phone)
212-854-8059 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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