Import tariffs and growth in a small open economy (original) (raw)
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Differential tariffs, growth, and welfare in a small open economy
Journal of Development Economics, 2000
This paper analyzes the effects of consumption and investment tarrifs on growth and welfare. With endogenous laber supply, consumption tariffs are not growth-neutral. Instead, an increase in either tariff reduces both the short-run growth rates of key economic variables such as GDP, consumption, and foreign debt, and their common long-run equilibrium growth rate. Numerical simulations suggest that the investment tariff has a more adverse effect on growth rates and welfare than does a comparable consumption tariff. Accordingly, a revenue-neutral substitution of a consumption tariff for an investment tariff is both growth-enhancing and welfare-improving. The second-best and first-best optimal tariffs are characterized and shown to involve the heavy subsidization of investment. q S.J. Turnovsky . 1 Tel.:q1-206-685-8028; fax: q1-206-685-7477. 0304-3878r00r$ -see front matter q 2000 Elsevier Science B.V. All rights reserved. Ž . PII: S 0 3 0 4 -3 8 7 8 0 0 0 0 0 8 7 -0 ( ) T. Osang, S.
The Growth and Welfare Consequences of Differential Tariffs
International Economic Review, 1993
This paper analyzes the impact of differential tariffs on consumption and investment in a specific factors model of a small open economy in which capital is accumulated over time. Particular attention is devoted to the welfare aspects, highlighting the cost of the intertemporal distortions produced by protective trade policies. Several specific welfare propositions are obtained. Fist, tariff protection is shown to create short-run beneftts but long-run costs in welfare. Secondly, the second-best policy for the two tariffs is characterized. Finally, several propositions summarizing the implications of our analysis for tariff reform are derived.
Short and Long-Run Effects of Trade on Growth and Welfare
2011
In this paper, we study the short and long-run effects of trade on growth and welfare for a small open economy in a general equilibrium model with four sectors or industries: two sectors produce consumption goods, one produces physical capital, and one produces human capital. The multi-sector framework is important because it is the basis for the endogenous growth mechanism in the model. In addition, it enables us to study the effects of an increase in the number of traded goods as well as the role of a non-traded good (human capital). If only consumption goods are traded, trade leads to complete specialization in one of the consumption goods but leaves unchanged the long-run autarky growth rate. If, however, there is trade in investment and consumption goods, long-run growth will be higher than in autarky provided that the country imports the investment and exports the consumption good. Finally, a revenue-neutral tariff and tax reform is likely to lower long-run growth rates but ma...
We present a growth model of international trade in which expectations about profitability and growth influence innovation and investment. Adaptive learning dynamics determine transition paths for countries with differing structural parameters. Countries limiting trade by tariffs on imports of capital goods can experience gains in growth and perceived utility for finite time, whereas the rest of the world is adversely affected. Asymmetric gains persist longer when structural advantages of the country applying tariffs are larger. Substantial differences in levels of innovation, output and utility can appear within our asymmetric country setting. Key words: Endogenous growth, expectations, learning, short run dynamics, tariffs, complementary capital goods. JEL codes: F43, F15.
Trade and Growth In the Presence of Distortions By
2004
Tariffs and other policy distortions typically lower real national income relative to what it otherwise would have been for any given rate of factor accumulation. However, even while lowering real income, policy distortions may raise an economy’s real measured growth rate and so, somewhat deceivingly, give the impression that national welfare has benefited from things like tariff protection. This would be an incorrect conclusion. This paper discusses the issue of how protection can affect the rate of growth for a small, open economy. As shown by Johnson (1970), in the presence of exogenously given factor accumulation, a tariff can either raise or lower an economy’s growth rate (measured by the change in the value of output at world prices), relative to the no-distortion growth rate. We also discuss the relevance of this result for tariff uniformity, “tariff jumping ” foreign direct investment, and the empirical literature on trade and growth. Finally, we use a numerical simulation m...
Tariffs, Capital Accumulation, and the Current Account in a Small Open Economy
International Economic Review, 1989
This paper analyzes the effects of a tariff in an intertemporal optimizing model, emphasizing the role of capital accumulation. Three types of increases in the tariff rate are considered: (i) unanticipated permanent; (ii) unanticipated temporary; (iii) anticipated permanent. There are two main general conclusions to be drawn from the analysis. The first is that the introduction (or increase) of a tariff is contractionary, both in the short run and in the long run. In particular, employment is reduced both in the short run and in the long run, so that there is no significant intertemporal tradeoff, as obtained by previous authors. The fail in the long-run capital stock causes an immediate reduction in the rate of investment, which in turn leads to a current account surplus. While this response of the current account is in accordance with much (but not all) of the existing literature, the mechanism by which it is achieved, namely the decummulation of capital, has not been previously considered. Also, the fact that the declining capital stock is accompanied by an accumulation of foreign bonds means that the savings effect of the tariff is unclear, depending upon which influence dominates. This ambiguity of savings is, however, vely different from those occurring in other studies. The second major conclusions stems from the fact that the steady state depended upon the initial stocks of the assets. As a consequence, a temporary tariff, by altering these initial conditions for some later date when the tariff is removed, leads to a permanent effect on the economy.
Growth, Expectations and Tariffs
SSRN Electronic Journal, 2000
We study a many-country endogenous growth model in which decisions about innovation and new investment are influenced by growth expectations. Adaptive learning dynamics determine the country-specific short-run transition paths. The countries differ in basic structural parameters and may impose tariffs on imports of capital goods. Numerical experiments illustrate the adjustment dynamics that follow the use of tariffs. We show that countries that limit trade in capital goods can experience dynamic gains both in growth and in utility and that such gains persist longer the larger the structural advantages of the region that applies tariffs. Substantial differences in levels of innovation, consumption, output and utility can appear, and asymmetries in economic outcomes that were present before trade restrictions are made more severe.
Growing through trade: the role of foreign growth and domestic tariffs
RePEc: Research Papers in Economics, 2015
This paper studies the role of trading partner' growth and a domestic import tariff in the possibility of growing through trade. To this purpose, a Ricardian model is developed in which a backward economy seeks to increase its long-run growth rate simply by trading with a faster growing partner. It is found that domestic growth may be either negatively affected or unaffected by a domestic import tariff, while it is always positively impacted by foreign growth. Furthermore, convergence in growth rate can emerge both with an import tariff and under free trade. Ours results are consistent with the empirical evidence.
Growing through trade in intermediate goods: the role of foreign growth and domestic tariffs
Scottish Journal of Political Economy
We show that pure Ricardian trade can account for the empirical evidence that domestic growth is more affected by foreign growth than by trade openness. To this purpose, we develop a two-country model including a backward economy that exchanges intermediate goods with a faster growing country. We obtain three main results regarding growth and welfare of the backward economy: (i) the growthenhancing comparative advantage is facilitated by faster foreign growth; (ii) the growth rate may be negatively affected or unaffected by a domestic tariff, while it is always positively impacted by foreign growth; (iii) a domestic tariff could be welfareimproving.
The Possibility of Welfare Gains with Capital Inflows in a Small Tariff-Ridden Economy
1997
Capital inflows with full repatriation give rise to welfare improvement possibilities in a small tariff-distorted economy when imperfect competition and increasing returns are allowed for in one sector of a two-sector model. This is in contrast to the Brecher-Alejandro proposition that capital inflows with full repatriation are necessarily immiserizing for a small tariff-ridden economy. We find that welfare gains chances are greater (a) the higher the expenditure share of the capital-intensive differentiated good; (b) the lower the substitutability between brands; and (c) the lower the share of tariff revenue in national income.