601-mbwp - DEPARTMENT OF ECONOMICS WORKING PAPER SERIES...

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DEPARTMENT OF ECONOMICS WORKING PAPER SERIES 2000-05 McMASTER UNIVERSITY Department of Economics 1280 Main Street West Hamilton, Ontario, Canada L8S 4M4 http://socserv.socsci.mcmaster.ca/~econ/
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Tari¤ Wars and Trade Deals with Costly Government John B. Burbidge and Gordon M. Myers ¤ 8 June 2000 Abstract. We study a simple model of tari¤ wars and trade deals in which government revenue collection and disbursement uses resources. The introduction of costly governments leads to lower non–cooperative tari¤s, the possibility that a less costly government may win a tari¤ war, and fully cooper- ative trade deals where countries lower tari¤s but do not eliminate them, even with lump–sum taxes and transfers. 1. Introduction The standard theoretical model of non–cooperative tari¤ determination leads to the familiar tari¤–war results (Johnson (1953)). Some authors, including Krugman (1993 pages 61 and 65 and his references), have argued that this standard theoretical result may be inconsistent with observation — non–cooperative tari¤s appear to be set more “cooperatively”, that is, lower. On the other hand, the traditional customs– union literature presumes free trade within each customs union. Here the reality is that tari¤s appear to be set less cooperatively, that is, higher. Even for members of trade blocs “cooperation” appears to be limited in the sense that trade deals while characterized by reciprocal reductions in tari¤s are not characterized by the elimination of tari¤s on all goods and services. The GATT under the auspices of the WTO furnishes many examples of such trade arrangements. This short paper provides a simple explanation for lower non–cooperative tari¤s and higher cooperative tari¤s. 1 Clearly the operation of a government requires resources. So we begin with a standard trade model and assume, for example, that hiring a customs o¢cer costs resources. We show that this simple extension yields two results in the tari¤-war ¤ Burbidge: Department of Economics, McMaster University, Hamilton, ON, L8S 4M4; Myers: Department of Economics, Simon Fraser University, Burnaby, BC, V5A 1S6, Canada, respectively. The …rst draft of this paper was written while Burbidge was visiting The University of Western Ontario. He is grateful to this institution for its hospitality and …nancial support. In addition, we thank SSHRCC for …nancial assistance, Gulriz Barkin for research assistance, seminar participants at the University of Western Ontario, and Richard Harris and Nicolas Schmitt for very useful conversations. 1 The literature contains at least two classes of extensions to the traditional models that permit positive tari¤s in cooperative trade deals. One is obtained by altering the traditional assumption that benevolent governments act in the nation’s self–interest. Examples of papers that would fall into this category are Grossman and Helpman (1994), Krugman (1993), and Ethier (1998). A second explanation assumes that trade deals are not fully cooperative in the sense that it is assumed countries cannot make binding international commitments, for example, Bagwell and Staiger (1997).
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This note was uploaded on 01/26/2012 for the course ECON 401 taught by Professor Burbidge,john during the Fall '08 term at Waterloo.

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601-mbwp - DEPARTMENT OF ECONOMICS WORKING PAPER SERIES...

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