Edited by William A. Kerr and James D. Gaisford
Chapter 17: Tariffs: National Welfare and Distributional Issues
17 Tariﬀs: national welfare and distributional issues Jean-Philippe Gervais and Bruno Larue Introduction Broad globalization forces are pressuring governments throughout the world to eliminate trade barriers and lower tariﬀs. In essence, the work started after World War II to lower tariﬀs on manufactured products is nearly complete; but agri-food trade liberalization only started in the mid-1990s. As a result, many countries still use tariﬀs to protect their borders from foreign competition. As such, tariﬀs are not obsolete trade instruments. Many reasons can be called upon to explain the persistence of tariﬀs in agri-food markets and in some other sectors. One strand of the literature appeals to political-economy considerations to rationalize the choice of trade instrument and the level of protection.1 Another factor that can explain border protection is the so-called terms of trade2 argument. This argument dates back to the nineteenth century and is almost as old as Ricardo’s principle of comparative advantage (Kemp 1966). It is based on the notion that a country that has a large enough trade volume to inﬂuence prices at which it trades can increase its level of welfare relative to the free trade benchmark by restricting trade below the free-trade level. The rationale for government intervention is a terms of trade externality because individual agents cannot by themselves exploit their joint market power. Hence, the government must step in to harness the country’s market power through a tax on trade. In the case of a large policy-active...
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