Strategic tariffs, tariff jumping, and heterogeneous firms (original) (raw)
2011, European Economic Review
The majority of research to date investigating strategic tariffs in the presence of multinationals finds a knife-edge result where, in equilibrium, all foreign firms are either multinationals or exporters. Utilizing a model of heterogeneous firms, we find equilibria in which both pure exporters and multinationals coexist. We utilize this model to study the case of endogenously chosen tariffs. As is standard, Nash equilibrium tariffs are higher than the socially optimal tariffs. Unlike existing models with homogeneous firms, we find that non-cooperative tariffs promote the existence of low-productivity firms relative to the socially optimal tariffs. This highlights a new source of inefficiency from tariff competition not found in models of homogeneous firms. In addition, we find that in many cases the Nash equilibrium tariff when FDI is a potential firm structure is lower than when it is not. As a result, FDI improves welfare by mitigating tariff competition. (M.T. Cole). 1 find that the threat of protection had a substantial positive effect on greenfield FDI in the U.S. in the 1980s. Similarly, investigate the effect of FDI on U.S. legislators' votes on protectionist policies between 1985 and 1994 and finds that quid pro quo FDI has an effect, but not in a systematic way. For instance, legislators who were initially more protectionist in nature tended to increase trade restrictions, where legislators who took a more free trade stance were inclined to lower trade restrictions.
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