Working Paper: CEPR ID: DP5540
Authors: Christian Broda; Nuno Lima; David E. Weinstein
Abstract: The theoretical debate over whether countries can and should set tariffs in response to export elasticities goes back over a century to the writings of Edgeworth (1894) and Bickerdike (1907). Despite the optimal tariff argument's centrality in debates over trade policy, there exists no evidence about whether countries actually apply it when setting tariffs. We estimate disaggregate export elasticities and find evidence that countries that are not members of the World Trade Organization systematically set higher tariffs on goods that are supplied inelastically. The result is robust to the inclusion of political economy variables and a variety of model specifications. Moreover, we find that countries with higher aggregate market power have on average higher tariffs. In short, we find strong evidence in favour of the optimal tariff argument.
Keywords: GATT; International Trade; Optimal Tariffs; Trade Policy; WTO
JEL Codes: F13; F14; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| export supply elasticity (F10) | tariffs (F13) |
| market power (L11) | tariffs (F13) |
| tariffs (F13) | export supply elasticity (F10) |
| political economy variables (P42) | tariffs (F13) |