A Welfare Ranking of Multilateral Reductions in Real and Tariff Trade Barriers when Firms are Heterogenous

Abstract

Trade liberalization comes about through reductions in various types of trade barriers. This paper introduces, apart from the customary real trade costs (i.e. iceberg and fixed export costs), two revenue generating trade barriers (i.e. an ad valorem tariff and a trade license) into a standard heterogeneous‐firms‐trade model with Pareto distributed productivities. We derive analytical welfare rankings of all four liberalization channels for an equal effect on two openness measures, for any trade cost level and while all four barriers are simultaneously present, i.e. for any initial equilibrium. We show that when openness is measured at retail prices, not border prices, the welfare rankings are sensitive to the degree of efficiency in revenue redistribution, e.g. the share of tariff revenues wasted on rent‐seeking activities. As a result, multilateral tariff reductions can switch from the least to the most preferred mode of liberalization. Among the other three barriers we establish a universal welfare ranking for any strictly positive level of revenue redistribution and for either measure of openness.

The welfare consequences of import tariffs: A quantitative perspective

“…28 In both experiments, we assume that there are no tariffs in the initial situation. Then, we introduce a unilateral import tariff of 40% in the United States against all trading partners.…”

“…Column 2 27 However, compared to other generalizations of the ACR framework discussed by CR (such as allowing for multiple sectors and input-output linkages), in a world where tariffs are generally low, ignoring tariff revenue is of relatively minor quantitative importance. 28 Following them, counterfactuals are based on data consistent with bilaterally balanced trade. Moreover, we set κ = 1.…”

Inward FDI in East Asian & Pacific Developing Countries due to WTO Led Liberalisation

“…The host nations enacted additional limitations on repatriation of profits back home concerned by the fact that major share of the MNC gains were transferred abroad. These measures clipped the transitory tariff jumping FDI gains of overseas investors and reduced the host location advantage vis-à-vis other potential investment sites (Schröder & Sørensen, 2014).…”

Icebergs Versus Tariffs: A Quantitative Perspective on the Gains from Trade

“…Presence of a firm from i on a market j requires payment of fixed costs w j f ij in terms of labor from the destination country j. Only firms with ϕ ≥ ϕ * ij will be earning sufficiently much revenue (24) The regularity condition that guarantees finite variance of the sales distribution is θ > 2. Another regularity condition postulates θ > σ − 1 = ρ/ (1 − ρ).…”