Whether to Choose Tariffs or Subsidies to Protect a Domestic Industry

Egli, Dominik; Westermann, Frank

doi:2003.18.1.150

The Journal of Economic Integration 2003 March;18(1) :150-163.
DOI: https://doi.org/10.11130/jei.2003.18.1.150

Whether to Choose Tariffs or Subsidies to Protect a Domestic Industry

Dominik Egli, Frank Westermann,

Universität Bern
UCLA and CESifo

ABSTRACT

The use of tariffs in the absence of subsidies in small countries is an empirical observation which stands in sharp contrast to the theoretical literature of trade policy. We analyze the welfare effects of tariffs and subsidies in a homogeneous good duopoly game with cost asymmetries between the two firms, allowing for distortionary taxation. We find that for reasonable values of the distortion parameter or for a large cost disadvantage of the home firm, a tariff is the optimal policy tool.

Keywords: Strategic trade | Economies in transition | Cost asymmetries | Distortionary taxation

REFERENCE

1.	Neary, J. Peter (1994), Cost Asymmetries in international Subsidy Games: Should Governments help Winners or Losers?, Journal of International Economics 37, 197218.

2.	Cordella, Tito (1993), Trade Liberalization and oligopolistic Industries: A Welfare Appraisal, Recherches-Economiques-de-Louvain 59, 355-63.