Should Smaller Countries Be More Protectionist? The Diversification Motive for Tariffs |
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Authors: | James Gaisford Olena Ivus |
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Institution: | 1. +1‐250‐828‐5200;2. Faculty of Arts, Thompson Rivers University, , Kamloops, BC, V2C 0C8 Canada;3. Queen's School of Business, Queen's University, , Kingston, ON, K7L 3N6 Canada |
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Abstract: | This paper examines the diversification motive for tariffs under trade‐related uncertainty when there is incomplete international and domestic risk sharing. In the context of a two‐country Ricardian continuum‐of‐sectors model with shocks to foreign technologies or preferences, tariffs allow a country to mitigate external risk by diversifying across sectors. Given sufficiently high risk and risk aversion, the optimality of tariffs depends primarily on a country's ability to diversify, rather than its market power, such that small countries gain most. |
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