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Trade Theory, Analytical Models and Development

Essays in Honour of Peter Lloyd, Volume I

Edited by Sisira Jayasuriya

Trade Theory, Analytical Models and Development, comprises 11 essays offering new contributions on the following topics: trade and wages; factor endowments, factor mobility and political economy of trade; optimality of tariffs; measurement of welfare; customs union theory; endogenous mergers and tariffs; intra-industry trade; state trading enterprises and trade liberalisation; general equilibrium effects of e-Commerce, and trade; economic growth with production and consumption externalities; and environmental pollution and resource degradation.
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Chapter 3: Are uniform tariffs optimal?

Mary Amiti


49 upstream and downstream industries, that are vertically linked through an input–output structure; and a perfectly competitive ‘agricultural’ industry, with constant returns to scale technology, employing labour and capital. Upstream firms produce intermediate inputs, using labour and capital, which they sell to firms in the downstream industry. Downstream firms combine intermediate inputs with labour and capital to produce final manufacturing goods, which they sell to consumers. The market structure in each of the vertically linked industries is assumed to be Chamberlinian monopolistic competition: there are many firms in both industries, each employing increasing returns to scale technology and producing differentiated goods. Each firm can choose to locate in either country and it draws on the labour and capital available in the country in which it locates. Trade costs are modelled as tariffs and real resource costs. Tariff rates can differ between upstream and downstream firms. We include positive real resource costs throughout the analysis for two reasons. One is that production patterns are indeterminate if all trade costs are zero because the number of industries is greater than the number of factors. Two, allowing for real resource costs in transporting goods highlights that even if we can reduce tariff rates to zero we cannot reduce the cost of shipping goods between countries to zero and these real resource costs affect location. Utility We present the model for country l and note that symmetric equations hold for country k. All subscripts denote the country and superscripts...

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