ALTERNATIVE OPTIMAL TRADE POLICIES IN THE PRESENCE OF FOREIGN INPUT MONOPOLY

Abstract.  This paper develops a generalized three-country model with downstream and upstream industries to analyze optimal import and export trade policies in the presence of monopoly distortion in a foreign intermediate input market. It shows that the import tariff and export tax are linearly dependent. Thus, the optimal choice of the tariff gives rise to the same results as the optimal choice of the export tax, which implies that the domestic government, to avoid tariff retaliation, can use export tax as a substitute for the import tariff.     

Countervailing Duties, Foreign Export Subsidies and Import Tariffs

Given that countervailing duties and import tariffs are set in different ways and for different purposes, I re-examine the relationship between countervailing duties, foreign export subsidies and import tariffs under imperfect competition. I find that (i) the optimal countervailing duty depends on the existing import tariff level; (ii) the optimal import tariff is so high that the optimal countervailing duty is zero and hence foreign export subsidization occurs; and (iii) it is more likely for countervailing duties to be imposed on a foreign firm whose government takes no action when other foreign countries reduce or eliminate their subsidies on exports.     

Optimal policy for environmental goods trade in asymmetric oligopolistic eco-industries

In this paper, we examine the optimal structure of an environmental tax to pollution, a production subsidy to a domestic eco-industry, and an import tariff on environmental goods (EGs) in a two-country model where the home country imports EGs from the foreign country. Home and foreign firms that produce EGs engage in Cournot competition. We then assume that the number of the home local firms which produce EGs is constant, but that of the foreign firms is variable. Our main findings are as follows: (I) The optimal environmental tax level may be lower than the Pigouvian level even if the tax has a positive impact on the output of EGs produced by a domestic firm. (II) The optimal tariff level may be positive when the country implements the first best policy combination in a closed economy regarding the environmental tax and the subsidy. (III) The optimal subsidy level may be positive, and then the subsidy may be substitutive for the import tariff on EGs.     

Optimal Tariffs under a Revenue Constraint*

This paper examines the optimal tariff structure under a revenue constraint. When a fixed level of tax revenue has to be collected from the tariff alone, no adjustment in tariff rates can achieve an efficient resource allocation, even in a small open economy. Hence, the optimal tariff problem arises under a revenue constraint. We show that the revenue‐constrained optimal tariff structure is characterized by the following two rules: (i) the optimal tariff rate is lower for the import good that is a closer substitute for the export good, and (ii) the stronger the cross‐substitutability between imports, the closer the optimal tariff is to uniformity. This provides a theoretical explanation for the finding in empirical studies that the efficiency loss from a uniform tariff structure is negligible.     

The political economy of tariff protection in China: evidence from the WTO accession

We analyze China's tariff rates at WTO accession using a political economy approach. A model drawing on Branstetter and Feenstra ( 2002 ) is used to derive an optimal tariff rate for each industry. The model predicts that a government would set a high tariff rate if an industry is of large state‐owned enterprise (SOE) share, multinational share, or small foreign import share. From the model we reveal the Chinese government's preference towards different interest groups under the binding tariff constraint from the WTO commitments. The estimated structural parameters imply that the political weights on both the SOE profits and consumer income diminish with the economic opening. More important, the government still favours SOEs over consumer income. Our findings are consistent with the special features of China's economy.     

US Ethanol Trade Policy: Pollution Reduction or Domestic Protection

To mitigate dependence on fossil fuel and reduce pollution, the US government has undertaken several policies—an import tariff, tax credit, and mandate—to augment domestic ethanol production and increase ethanol in the fuel supply. This study uses a general equilibrium model to analyze the effects of the US ethanol import tariff on welfare by internalizing the externality and incorporating US fuel and ethanol policies and to determine the optimal tariff. The results show that because of the environmental benefits of imported ethanol, the adverse effects of domestic ethanol on the environment, the need for the imported ethanol to boost the blended gasoline production, and the economy‐wide interactions of various markets, the optimal trade policy may call for subsidizing rather than taxing ethanol imports.     

Tariff,Growth, and Welfare

We develop a two‐country (Home and Foreign) by two‐good (consumption good and investment good) by one factor (capital) endogenous growth model with international knowledge spillover to study the relationship between an import tariff and economic growth and welfare. First, unlike the past literature, we do not need to make an assumption such that the growth rates between countries are identical in a balanced growth path (BGP). Second, we show that there exists a unique and saddle‐point BGP with both countries being incompletely specialized. Third, a higher import tariff on the consumption good in the domestic country may boost (reduce) the rate of economic growth when the foreign (domestic) country has an absolute advantage in the investment good. Finally, a rise in the tariff rate by one country may improve world welfare under some parameter spaces.     

Research and development and trade policies for product innovation in the presence of foreign competition

This paper examines two policy instruments — a matching grant and import tariffs — for encouraging research and development (R&D) in product innovation by a domestic firm when it faces foreign competition. We do so by developing a theoretical model of product innovation where R&D effort is endogenous and its outcome uncertain. We examine the effects of a reduction in import tariffs on private expenditure on R&D, on public support for such R&D, and on total R&D expenditure. We find that in response to a reduction in import tariffs, the domestic firm always reduces its private R&D investments, but the total level of R&D expenditure (i.e., including public support) might go up depending on the level of tariffs. In particular, we find that it will go up if the initial level of tariff is higher than a critical level. When tariff is endogenous, we find that the socially optimal level of tariffs is positive. One finding that is of particular interest is that supporting private attempts to product innovate in the form of a matching grant program leads to a socially optimal level of product R&D.     

TARIFFS AND IMPORTS MISINVOICING UNDER OLIGOPOLY

Mismatch of trade statistics between developed and developing countries indicate a substantial misinvoicing of trade figures, primarily by developing country traders. This is due to the inflexible exchange rate regimes, severe import restrictions and export subsidies prevailing in Less Developed Countries (LDCs). In this paper, we focus on import underinvoicing due to high tariff barriers in a market where domestic producers compete with importers. Specifically, we examine how tariff levels, market structure and government intervention (in the form of intensity of monitoring and severity of penalties) affect the levels of underinvoicing. We also look at the optimal levels of import tariff and instruments of government intervention in these circumstances.     

Protection and Exchange Rates in a Small Open Economy

In a small‐open‐economy model with two tradables and one nontradable, if a price index of these three goods is stabilized and the exchange rate is flexible, conditions are obtained in the cases of two and of three or more factors for an export subsidy or an import tariff to result in currency appreciation. In the case of three or more factors, conditions are obtained under which either an export‐subsidy or an import‐tariff policy (or a combination) can take the place of a flexible exchange rate in accommodating the necessary resource allocation to an exogenous capital outflow, generalizing Keynes’s 1931 proposition.