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Endogenous Tariffs in the Presence of Multinationals

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  • Mario Larch

Abstract

This paper analyzes the effect of the presence of multinational firms on endogenous tariff rates, using an analytically solvable two-country model with fixed terms of trade. Noncooperative tariffs are lower in the presence of market-seeking (horizontal) foreign direct investment (FDI). Such firms avoid trade and entail a loss of tariff revenues for importing countries. In the case of low-cost-seeking (vertical) FDI, the results are less clear-cut and the noncooperative tariff rate can turn out to be a subsidy. The world-welfare-maximizing policy is an import subsidy.

Suggested Citation

  • Mario Larch, 2008. "Endogenous Tariffs in the Presence of Multinationals," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(3), pages 534-567, September.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200809)164:3_534:etitpo_2.0.tx_2-a
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    References listed on IDEAS

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    1. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
    2. Azrak, Paul & Wynne, Kevin, 1995. "Protectionism and Japanese direct investment in the United States," Journal of Policy Modeling, Elsevier, vol. 17(3), pages 293-305, June.
    3. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
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    Cited by:

    1. Matthew T Cole & Ronald B Davies, 2009. "Optimal Tariffs, Tariff Jumping, and Heterogeneous Firms," Working Papers 200919, School of Economics, University College Dublin.
    2. Cole, Matthew T. & Davies, Ronald B., 2011. "Strategic tariffs, tariff jumping, and heterogeneous firms," European Economic Review, Elsevier, vol. 55(4), pages 480-496, May.

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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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