optimal tariffs: the evidence broda, limão and weinstein american economic review 2008

“Optimal Tariffs: the Evidence”

Broda, Limão and Weinstein

American Economic Review 2008.

Quotes

“a primary objective of trade policy is to protect special interests, rather than improve and/or maintain the terms of trade” (Krutilla 1991 p.139)

“small countries have very little ability to affect the world prices of either their imports or other exports, so that the terms-of-trade argument is of little practical importance” (Krugman and Obstfeld 1997, p. 226)

g

gggg

z

a

I

X

P

dP

dX1

This is (one of) first paper(s) to provide evidence that optimal tariff considerations do actually influence trade policy.tariff*=ω=

where ω= is inverse of foreign export supply (X) elasticity.Grossman & Helpman (1995):(7)

Calculate country specific estimates of export supply elasticities for 15 countries: Algeria, Belarus, Bolivia, China, Czech, Ecuador, Latvia, Lebanon, Lithuania, Oman, Paraguay, Russia, Saudi Arabia, Taiwan, Ukraine

DataTariffs: TRAINS (from UNCTAD)Trade: COMTRADE. 4-digit Harmonized System (HS) data

• Use calculated elasticities as indicator of “market power”: low market power (bottom tritile) vs medium/high mkt power (top two tritiles)

• Test #1 for the relationship between market power and import tariffs.

• Figure 3: cross-sectional regression plotting median tariff against median inverse export elasticity (at country level or a HS4 level?);

Test #2: baseline model

(13)τig=βif(ωig)+ηiG+xigγ +uig

Use instrument for market power

What if what’s really going on is that government uses tariffs to raise revenues, and market power measure is correlated with optimum-revenue-generating-tariff?Include (fitted) values of inverse import demand elastictity:

Maybe it’s about politics?Use production data to calculate ratio of domestic production to imports. Then divide this by import demand elasticity and include the ratio as an independent variable. See columns 5 and 6 of Table 10.

Is there something special about these countries? Look at US’ “statutory tariffs”

Table 13

Test whether relationship holds for NTBs

Conclusions

• Market power does impact tariffs when govt’s setting rates noncooperatively.

• Market power doesn’t seem to influence tariffs when are set cooperatively.

• Politics matters too, but not as much