Article

Tariff strategies and small open economies

Canadian Journal of Economics 02/2000; 33(1):25-40. pp.25-40
Source: RePEc

ABSTRACT In this paper we examine the issue of optimal tariffs for a small economy that trades with a large economy. We define "small" and "large" in the sense that the world prices are determined solely by the large country, and, therefore, the small country faces exogenously given world prices. Within this framework it is shown that there exist situations in which the small country has an incentive to behave as a Stackelberg leader by committing itself to a non-zero optimal tariff. Although the small country is unable to directly affect world prices, by pre-committing to a non-zero trade tax it may induce a reduction of the large country's optimal trade tax, thereby indirectly improving its terms of trade and welfare.

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Keywords

large country's optimal trade tax
 
non-zero optimal tariff
 
non-zero trade tax
 
optimal tariffs
 
small
 
small country
 
small economy
 
Stackelberg leader
 
trades
 
world prices