Mobile capital, optimal tariff, and tariff war

Hajime Takatsuka, Dao Zhi Zeng

Research output: Contribution to journalArticlepeer-review

Abstract

Using an intra-industry trade model with mobile/immobile capital, we revisit the characteristics of optimal tariffs and tariff wars. In contrast to folk wisdom on optimal tariffs, we show that when capital is freely mobile across countries, smaller countries impose higher tariffs, and they can win tariff wars. This occurs because tariffs have a strong impact on output expansion. Even if capital import taxes are available, small countries can win tariff wars, although larger countries may apply higher tariff rates.

Original languageEnglish
JournalReview of International Economics
DOIs
Publication statusAccepted/In press - 2021

Keywords

  • mobile capital
  • monopolistic competition
  • optimal tariff
  • tariff war

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Development

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