Tari¤ Wars and Trade Deals with Costly Government
John B. Burbidge and Gordon M. Myers
8 June 2000
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.
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.
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
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
self–interest. Examples of papers that would fall
into this category are Grossman and Helpman (1994), Krugman (1993), and Ethier (1998).
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).