Essays on Tariff Formation

Abstract

In an era of enhanced trade liberalization the study of tariff policy and formation assumes increasing importance. This dissertation explores tariffs under three different contexts.

First, we examine the effect of technology on the choice of external tariffs by trading nations. The literature on tariffs usually assumes that trading partners are symmetric in key fundamental parameters such as factor endowments, technology, preferences, policy and institutional frameworks. This is done in the interest of tractability given the complexity of the problems addressed. There thus exists scope for research on the impact of inter-country differences in fundamentals on policy preferences. We examine the relationship between a key asymmetry, namely technology, and tariff selection in a dual general equilibrium model along the lines of Dixit and Norman (1980). We find that it is possible to rank tariffs by comparing the compensated price elasticity of the import demand function. An expression for this elasticity in terms of a technological shift parameter is found and tariffs ranked under various specifications of the parameter. An empirical exercise using a cross-sectional sample of 42 countries finds some evidence of an inverse relationship between technology and tariffs.

Second, we study reciprocal trade liberalization in a two country setting that allows for asymmetry in country size. The analysis draws on Furusawa (1999) wherein it is suggested that as long as status-quo tariffs are invariant during the negotiation process, the country with the higher status-quo tariff rate benefits more from the negotiation and vice-versa. We formalize this insight by explicitly introducing country size and asymmetric status-quo tariffs in a Rubinstein-type bargaining model. Our findings indicate that a large country will gain more from tariff negotiations regardless of the patience exhibited by the smaller country during the bargaining process.

Third, we use two new measures of openness, namely the Trade Restrictiveness Index and the Mercantile Trade Restrictiveness Index (Anderson and Neary, 1996, 2003) to empirically examine the relationship between a country's size and outward orientation. We find that the negative relationship between country size and openness reported in the literature holds when these two measures are employed.