Welfare Effects of Tariff Reduction Formulas

World Trade Organization (WTO) negotiations rely on tariff reduction formulas. Formula approaches are of increasing importance in trade talks, because of the large number of countries involved, the wider dispersion in initial tariffs (e.g. tariff peaks), and gaps between bound and applied tariff rates. This paper presents a two country intra‐industry trade model with heterogeneous firms subject to high and low tariffs. We examine the welfare effects of applying three different tariff reduction formulas discussed in the literature that were used and proposed in previous and current General Agreement on Tariffs and Trade (GATT)/WTO negotiations (1) a proportional cut, (2) the Swiss formula and (3) a tiered formula. No single formula dominates for all conditions. The ranking of the three tools depends on the degree of product differentiation in the industry and the achieved reduction in the average tariff.     

Developing-Country Benefits from MFN Relative to Regional/Bilateral Trade Arrangements

Using a general‐equilibrium model of world trade, this paper evaluates the benefits of most‐favored‐nation (MFN) treatment to developing countries in multilateral relative to bilateral or regional trade agreements, from three sources. First, developing countries may be able to free‐ride on bilateral tariff concessions exchanged between larger countries in MFN‐based GATT/WTO rounds. Second, MFN benefits developing countries by restricting discriminatory retaliatory actions by other countries, evaluated here by a non‐ cooperative Nash tariff game. Finally, MFN changes threat points in bargaining and hence affects the bargaining solution of multilateral MFN‐based trade negotiation compared to a bilateral/regional arrangement. The authors find that the benefits to developing countries are small in the first case as the tariff rates are already low, and the benefits are small in the second case as the optimal tariffs under unconstrained retaliation are not very asymmetric. Benefits from the third case are large as large countries can extract large side‐payments if they bargain bilaterally.     

The Role of Gatt in Trade Negotiations: A Game-Theoretic Perspective

The purpose of this paper is to explain theoretically the role of GATT in tariff negotiations, without narrowly interpreting GATT as an agreement. This paper, which establishes a game model where two nations are involved in tariff negotiations, shows the following points. First, free trade is difficult to realize even in a world with complete information. Second, GATT can serve as a mechanism for nations to find a particular cooperative tariff under incomplete information. Third, gradual tariff reduction can be explained as the interaction between the gradual decline of domestic political pressure and multilateral tariff negotiations under GATT. [F13]     

Effects of Multilateral Trade Liberalization on Prices*

To analyze the effects of simultaneous tariff reductions by multiple importing countries on prices, we construct a simple three‐country model where a good is produced by a monopolist with nonconstant marginal cost and imported by two countries. We compare two representative tariff‐reduction formulas: the “fixed‐amount” and the “uniform percentage” reductions. The uniform percentage reductions may increase the consumer price in the importing country, whose initial tariff is lower. Thus, importing countries with relatively low tariffs may prefer a bilateral trade agreement to a multilateral one to ensure consumer gains.     

Are developed country multilateral tariff reductions necessarily beneficial for the U.S.?

Since the formation of the GATT in 1947, the belief underlying U.S. participation in GATT multilateral tariff reductions has been that they are beneficial to the U.S. This paper reports general equilibrium computations of the welfare effects of a 50% multilateral tariff reduction among developed countries using a seven region world trade model due to Whalley (1982).     

“GATT‐think” with Asymmetric Countries*

We argue that a trade agreement which conforms to GATT’s reciprocity rule benefits the (stronger) less trade‐dependent country at the expense of the (weaker) more trade‐dependent country. Reciprocity is so unfavorable to the weaker country that it may be worse off under reciprocity than under the Nash‐ bargaining solution, a “power‐based” approach to trade negotiations that reflects power asymmetries among trading partners. Our results question Bagwell and Staiger’s (1999 , 2000 ) view of reciprocity as a rule that “serves to mitigate the influence of power asymmetries on negotiated outcomes.”     

GAME-THEORETIC ANALYSIS OF CHINA's WTO ACCESSION

Abstract.  This paper studies the determination of split of total surplus among the negotiating parties (member countries and the acceding country) in a WTO accession negotiation using a sequential bargaining model. In particular, we are interested in the effect of the most-favored-nation (MFN) principle on the negotiation outcome. The MFN principle says that any tariff reduction offered by the applicant for accession has to be automatically granted to all existing members. The model suggests that it is quite plausible that China's share of surplus is more when MFN is in place.     

INFANT INDUSTRY AND POLITICAL ECONOMY OF TRADE PROTECTION

Abstract.  This paper introduces infant-industry considerations in political economy determination of trade protection. I build a model where the government cares about both political contributions and national welfare. A potentially beneficial high-tech industry is not viable in the country whose initial human capital is low. In the political economy equilibrium, we find that the tariff schedule will be V-shaped: it decreases initially to maintain the viability of the industry but increases thereafter as the industry expands and gains political power. We use the model to explain both China's tariff offers in WTO negotiations and GATT/WTO rules regarding developing countries.     

The role of the most favored nation principle of the GATT/WTO in the New Trade model

I study the impact of the most favored nation (MFN) principle of the GATT/WTO on bilateral trade agreements in the New Trade model. The paper offers four main predictions. First, a bilateral trade agreement without external tariff adjustments hurts the outside country, while a bilateral trade agreement under MFN benefits the outside country. Second, the MFN principle may cause a free‐rider problem. Third, a Pareto‐improving bilateral trade agreement under MFN does not exist if initial tariffs and the elasticity of substitution are sufficiently low. This suggests that the MFN principle may prevent bilateral trade agreements in the future when tariffs are already low and that the definition of “like products” in the MFN rule is welfare improving only if it covers only goods that are closely substituted. Fourth, in the future when tariffs are low, multilateral negotiations and preferential trade areas will become more desirable. Using a calibrated 10‐region 33‐industry model, I show that around 30% of bilateral trade agreements that would be agreed upon in the absence of the MFN rule could not be agreed upon if the MFN rule is imposed.     

中国实施TBT的必要性文献综述

经过关贸总协定/世界贸易组织（GATT/WTO）等国际组织的多年努力,关税水平有了大幅度的削减,与此同时,一些传统的非关税壁垒也被纳入了规范管理行列,使得这些壁垒对本国的进口保护作用日趋下降。作为发展中国家的中国是否应该设置技术贸易壁垒（TBT）,从而保护人们的财产安全,是一个亟待解决的问题。     

Capital Imports and Tariffs

This paper develops a three‐sector, three‐factor specific factor model with a tariff and presents conditions under which capital imports and tariffs can be welfare enhancing in a developing country. The impact on welfare depends on the tariff revenue effect and the repatriation effect. A capital import is welfare enhancing if it reduces the domestic output of imports. A tariff is welfare enhancing only if it reduces the return to foreign capital.     

Exempted sectors in free trade agreements

Almost all participants in free trade agreements (FTAs) exclude at least a few products or sectors from complete tariff removal on the exports of their FTA partners. The positive tariffs that remain within an FTA are often the highest tariffs that the countries apply on an MFN basis. It seems plausible that such exclusions may be chosen because the domestic producers of these products are viewed as especially vulnerable to competition from imports from the partner country. In brief, they are especially “sensitive sectors.” We develop this idea theoretically and then test it empirically on data from 37 countries in 240 importer–exporter pairs within FTAs. We find support for the sensitive‐sector hypothesis only in the high‐income countries. We find that low‐income countries, in contrast, exempt sectors where bilateral tariff removal would be more likely trade‐diverting and therefore harmful. Our explanation for this, supported empirically, is not that they are following the advice of trade economists, but rather that they are avoiding loss of tariff revenue and may also perhaps be influenced by the greater bargaining power of richer and/or larger partners in their FTAs.     

Protection with many sellers: An Application to Legislatures with Malapportionment

What effect, if any, does legislative malapportionment have on international trade protection? This paper argues that in malapportioned legislatures, such as the U.S. Senate, industries become over‐represented in a legislature if they are disproportionately located in small constituencies. As a result, industries that are disproportionately located in smaller constituencies are likely to receive greater protection from international trade. To argue this point theoretically, this paper develops a new model, combining legislative bargaining and a model of lobbying to study trade protection while allowing for a legislature with multiple legislators and differently sized constituencies. We then test the predictions of this new model using tariff votes from the U.S. Senate in the late nineteenth and early twentieth centuries and a panel of tariffs and non‐tariff barriers to trade in the U.S. in the 1990s. Considerable support is found for the model's predictions. Industries concentrated in states where the population is low receive greater protection from imports.     

Free Trade Agreement and Vertical Trade with a Manufacturing Base

We examine the effects of free trade agreement (FTA) on tariffs and welfare in a three‐country model with vertical trade, where an FTA is formed between a country exporting a final good whose production involves using an intermediate good, and a country exporting the intermediate good in exchange for the final good. We demonstrate that the FTA reduces its member country's external tariff, whereas it raises the non‐member country's tariff. The non‐member country unambiguously becomes better off. In contrast, the FTA may or may not make its member countries better off. This implies that the formation of an FTA may not always be Pareto‐improving.     

A larger country sets a lower optimal tariff

We develop a new optimal tariff theory that is consistent with the fact that a larger country sets a lower tariff. In our dynamic Dornbusch–Fischer–Samuelson Ricardian model, the long‐run welfare effects of a rise in a country’s tariff consist of the direct revenue, indirect revenue, and growth effects. Based on this welfare decomposition, we obtain two main results. First, the optimal tariff of a country is positive. Second, the optimal tariff of a country is likely to be decreasing in its absolute advantage parameter, implying that a larger (i.e., more technologically advanced) country sets a lower optimal tariff.     

Tariffs, licensing and market structure

This paper challenges the conventional wisdom that exclusive owners of an advanced technology are always better off when producing as a monopolist than when competing against another firm. Competition against a less-efficient firm weakens the power that a host country can exert on the incumbent in the form of its tariff policy. We show that this gives a motive for a monopolist to license its technology to another foreign firm. A host country gains more from increased competition if it can induce the foreign incumbent to transfer technology to the host country firm. We show that the host country can do so by tariff commitment. We also discuss the implications of bargaining under licensing and Bertrand competition in the product market. Hence, this paper qualifies and extends the recent work of Kabiraj and Marjit [Protecting consumers through protection: The role of tariff-induced technology transfer. European Economic Review 47, 113-124].     

Can a Regional Trade Agreement Benefit a Nonmember Country without Compensating It?

RTAs are generally formed without any tariff concessions or transfers to nonmember countries. Can such an RTA benefit nonmembers' welfare? In a two‐good three‐country competitive equilibrium model in the absence of an entrepôt, an RTA without concessions to a nonmember will hurt nonmembers' welfare when goods are normal. If one of the member countries is an entrepôt, however, it definitely improves nonmembers' welfare. In a three‐good three‐country model, an RTA without concessions damages the nonmember's welfare, provided that all the goods are normal and substitutes, and that initial tariff levels are small.     

Stable Tariffs and Retaliations*

A two‐country, two‐commodity model of trade is considered to reformulate the tariff retaliations. It is known that tariff retaliations lead to a Nash‐equilibrium, a non‐free‐trade outcome. However, the negotiation process underlying the Nash equilibrium does not capture the notion of retaliation properly. We use the “contingent threat situation” to reformulate tariff retaliations. In this context, we show that the free trade is a stable outcome. More surprisingly, this interesting result is also valid for the “Johnson case,” where one country is better off under the tariff‐ridden Nash equilibrium compared to free trade.     

Regional Trade Agreements and Cross‐border Lobbying: Empirical Evidence from the Canada–US Free Trade Agreement Negotiations

This paper documents participation of special interest groups in negotiations of the Canada–US Free Trade Agreement. Using data on the tariff reduction schedules mandated by the agreement, it shows that industries represented by strong lobby groups were faced with more favorable tariff reduction paths in both countries: phase‐out periods were longer at home and shorter in the partner country. This result provides evidence on the involvement of industry lobbying in negotiation of regional trade agreements and suggests that countries negotiating trade agreements are responsive to the interests of lobbying groups from across the border. Both results provide important implications for the political economy theory of trade agreements.     

Regional versus Multilateral Trade Liberalization,Environmental Taxation,and Welfare

The paper considers trade between identical countries with imperfectly competitive markets, and compares the impacts of regional and multilateral tariff reduction on strategic environmental taxation and welfare. While both forms of trade liberalization increase production and consumption in tariff‐reducing countries, regionalism also reduces production in a non‐participating country and may decrease its consumption. Consequently, regionalism and multilateralism change pollution tax and welfare in the tariff‐reducing countries in similar ways when pollution is local, but in dissimilar ways for global pollution. When pollution is global, regionalism is likely to be preferred to multilateralism for the establishment of free trade among countries.