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Title:Optimal tariffs, retaliation and the welfare loss from tariff wars in the Melitz model PDF Logo
Authors:Felbermayr, Gabriel
Jung, Benjamin
Larch, Mario
Issue Date:2011
Series/Report no.:CESifo working paper: Trade Policy 3474
Abstract:This paper characterizes analytically the optimal tariff of a large one-sector economy with monopolistic competition and firm heterogeneity in general equilibrium, thereby extending the small-country results of Demidova and Rodriguez-Clare (JIE, 2009) and the homogeneous firms framework of Gros (JIE, 1987). The optimal tariff internalizes a markup distortion and a terms of trade externality. It is larger the higher the dispersion of firm-level productivities, and the bigger the country's relative size or relative average productivity. Furthermore, in the two-country Nash equilibrium, tariffs turn out to be strategic substitutes. Small or poor economies set lower Nash tariffs than large or rich ones. Lower transportation costs or smaller fixed market entry costs induce higher equilibrium tariffs and larger welfare losses relative to the case of zero tariffs. Similarly, cross-country productivity or size convergence increases the global welfare loss due to non-cooperative tariff policies. These results suggest that post WWII trends have increased the relative merits of the WTO.
Subjects:optimal tariffs
retaliation
tariff wars
heterogeneous firms
World Trade Organization
Nash equilibrium
JEL:F12
F13
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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