Skip to main content

An elementary model of export tax war

Abstract

In this paper, the author uses a generalized version of Kennan and Riezman (Int Econ Rev 29(1):81–85, 1988) trade war model with Stone–Geary preferences, where countries can choose between a Nash tariff or an export tax. Three scenarios emerge from this setting, namely: the standard tariff war, the export tax war and a mixed scenario—“the tariff-export tax war”—where one country applies a Nash tariff, while the other imposes an export tax. In this setting, countries derive their market power not only from their relative endowment size, but also from their subsistence consumptions. As a consequence, a large country does not necessarily win a trade war if it has a substantially higher consumption requirement than the small country. This finding explains why large economies sign trade agreements with small counterparts that prohibit the use of tariffs and export taxes.

This is a preview of subscription content, access via your institution.

Fig. 1

Source The European Commission 2014

Fig. 2

Source The European Commission 2014

Fig. 3

Notes

  1. 1.

    In KR (1988) pure exchange model, size asymmetry is captured by differences in countries’ endowments of both goods.

  2. 2.

    It is twice more likely to have export taxes in natural resources than in other sectors; this sector accounts for less than a quarter of all tradable sectors (World Trade Report 2010). Besides, large economies do not use these instruments; for example, in the United States, the use of export duties is prohibited by the Constitution (Zhang 2016).

  3. 3.

    In this setting, country size is captured by the endowment size of the export good, while the consumption requirements measure living standards. Typically, one will expect the large country to have higher consumption requirements (also referred to as subsistence consumption). Thus, the market power (elasticity of the import demand) depends positively on the country size, but negatively on consumption requirements.

  4. 4.

    Note that in Felbermayr et al. (2013), size is measured by both population size and productivity.

  5. 5.

    Table 1 shows that, while the average tariffs in US and the UK doubled, the increase was of a factor of 3 and more in other countries. In addition, the European countries listed in the table accounted almost for 40.5% of US exports and 20.1% of imports.

  6. 6.

    The term “mini-trade war” was coined by Breuss (2004); it outlines the limited scope of this trade dispute, compared to the Hawley–Smoot Tariff Act which increased approximately 900 American import duties (according to the Economist 2008).

  7. 7.

    These products include beef and pork products, carrots, chicory, Dijon mustard, French chocolate, goose pâté, jams, juices, onions, preserved tomatoes, Roquefort cheese, soups, toasted breads, truffles, yarn and agricultural-based byproducts such as glue and wool grease.

  8. 8.

    The imposition of export restrictions on CRMs ensures the supply of natural resources to domestic processing industries (Fung and Korinek 2013).

  9. 9.

    The EU and the US took the opportunity of the WTO accession of large raw material suppliers such as China, Kazakhstan and Russia to restrict their use of export restrictions. Moreover, the EU are in favor of commitments by all WTO members to bind and lower their export taxes (Solleder 2013).

  10. 10.

    Since import tariffs are equivalent to export taxes (the ‘Lerner symmetry’), countries cannot apply both trade policies at the same time.

  11. 11.

    It is implicitly assumed that the export tax is applied on raw materials; in fact, a recent report from the WTO on Trade policy and Natural resources (2010) mentions that “one interesting feature of natural resources trade is the extensive use of export taxes.” (p. 125)

  12. 12.

    It is easily verified that quantities consumed correspond to KR (1988) when \(a=b=0\) and \(s=t=1\).

  13. 13.

    One can easily verify that (13) collapses into expression (12) in Epifani and Vitaloni (2006) when \(a=b=0\).

  14. 14.

    Inserting (13) into (12) gives the expression (11), where Nash tariffs are solely functions of endowment parameters.

  15. 15.

    In fact, no trade occurs if \(\gamma ,\mu <1/2\). This inequality is called hereafter the feasibility condition.

References

  1. Bagwell, K., Mavroidis, P. C., & Staiger, R. W. (2007). Auctioning countermeasures in the WTO. Journal of International Economics, 73(2), 309–332.

    Article  Google Scholar 

  2. Bagwell, K., & Staiger, R. W. (1999). An economic theory of GATT. American Economic Review, 89, 215–248.

    Article  Google Scholar 

  3. Breuss, F. (2004). WTO dispute settlement: An economic analysis of four EU-US mini trade wars—A survey. Journal of Industry, Competition and Trade, 4(4), 275–315.

    Article  Google Scholar 

  4. Broda, C., Limao, N., & Weinstein, D. E. (2008). Optimal tariffs and market power: The evidence. American Economic Review, 98(5), 2032–2065.

    Article  Google Scholar 

  5. Chongbunwatana, K. (2004). Theories of tariffs: trade wars, trade agreements, and political economy. Ph.D. thesis, University of Nottingham.

  6. Crucini, M. J. (2007). Tariffs and the great depression revisited. In T. Kehoe & E. Prescott (Eds.), Great depressions of the twentieth century (pp. 305–334). Minneapolis: Federal Reserve Bank of Minneapolis.

    Google Scholar 

  7. Crucini, M. J., & Khan, J. (1996). Tariffs and aggregate economic activity: Lessons from the great depression. Journal of Monetary Economics, 38(3), 427–446.

    Article  Google Scholar 

  8. Epifani, P., & Vitaloni, J. (2006). GATT-think with asymmetric countries. Review of International Economics, 14(3), 427–444.

    Article  Google Scholar 

  9. Espa, I. (2015). Export restrictions on critical minerals and metals: Testing the adequacy of WTO disciplines. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  10. European Commission (1996). Green Paper on relations between the European Union and the ACP countries on the eve of the 21st century. Challenges and options for a new partnership. (COM 96/570 final of 29 November 1996). Accessed at http://eur-lex.europa.eu.

  11. European Commission (2008). The raw materials initiative—Meeting our critical needs for growth and jobs in Europe. A Communication to the European Parliament and the Council.

  12. European Commission (2014). On the review of the list of critical raw materials for the EU and the implementation of the raw materials initiative. A communication from the commission to the European parliament, the council, the European economic and social committee and the committee of the regions.

  13. European Commission (2015). Defining ’critical’ raw materials. Accessed 16 Mar 2015. http://ec.europa.eu/enterprise/policies/raw-materials/critical/index_en.htm.

  14. Felbermayr, G., Jung, B., & Larch, M. (2013). Optimal tariffs, retaliation, and the welfare loss from tariff wars in the Melitz model. Journal of International Economics, 89(1), 13–25.

    Article  Google Scholar 

  15. Fung, K., and J. Korinek (2013). Economics of export restrictions as applied to industrial raw material (OECD Trade Policy Papers, No. 155). Paris: OECD Publishing. https://doi.org/10.1787/5k46j0r5xvhd-en.

  16. Gros, D. (1987). A note on the optimal tariff, retaliation and the welfare loss from tariff wars in a framework with intra-industry trade. Journal of International Economics, 23(3–4), 357–367.

    Article  Google Scholar 

  17. Grossman, G.M. & Horn, H. (2012). Why the WTO? An introduction to the economics of trade agreements. In American Law Institute (Author) & H. Horn & P. Mavroidis (Eds.), Legal and Economic Principles of World Trade Law (The American Law Institute Reporters Studies on WTO Law). Cambridge: Cambridge University Press. https://doi.org/10.1017/CBO9781139839105.004.

  18. Johnson, R., & Hanrahan, C. E. (2010). The US-EU beef hormone dispute. In CRS Report for Congress. Congressional Research Service.

  19. Johnson, H. G. (1953). Optimum tariffs and retaliation. Review of Economic Studies, 21(2), 142–153.

    Article  Google Scholar 

  20. Kennan, J., & Riezman, R. (1988). Do big countries win tariff wars? International Economic Review, 29(1), 81–85.

    Article  Google Scholar 

  21. Korinek, J., & Kim, J. (2011). Export restrictions on strategic raw materials and their impact on trade and global supply. Journal of World Trade, 45, 255.

    Google Scholar 

  22. Krugman, P. (1980). Scale economies, product dierentiation, and the pattern of trade. American Economic Review, 70(5), 950–959.

    Google Scholar 

  23. Latina, J., Piermartini, R., & Ruta, M. (2011). Natural resources and non-cooperative trade policy. International Economics and Economic Policy, 8(2), 177–196.

    Article  Google Scholar 

  24. Madsen, J. B. (2001). Trade barriers and the collapse of world trade during the Great Depression. Southern Economic Journal, 67(4), 848–868.

    Article  Google Scholar 

  25. Mayer, W. (1981). Theoretical considerations on negotiated tariff agreements. Oxford Economic Papers, 33, 135–153.

    Article  Google Scholar 

  26. Office for promotion of parliamentary democracy (OPPD 2012), Economic partnership agreements EU-ACP: facts and key issues, 76 pages, European Parliament.

  27. Opp, M. (2010). Tariff wars in the Ricardian model with a continuum of goods. Journal of International Economics, 80(2), 2012–2225.

    Article  Google Scholar 

  28. Piermartini, R. (2004). The role of Export Taxes in the Field of Primary Commodities (Discussion Paper). Geneva: WTO.

  29. Ramrod, I. (2011). Shopping for raw materials Should Africa be worried about EU raw materials initiative (ecdpm Discussion Paper No 105).

  30. Solleder, O. (2013). Three Essays on Export Taxes. Ph.D. thesis, Graduate Institute of International and Development Studies.

  31. Syropoulos, C. (2002). Optimum tariffs and retaliation revisited: How country size matters. Review of Economic Studies, 69(3), 707–727.

    Article  Google Scholar 

  32. The Economist (2008). The battle of Smoot–Hawley. http://www.economist.com/node/12798595. Accessed 26 Apr 2017.

  33. WTO (2010). World Trade Report 2010: Trade in Natural Resources. Geneva: WTO.

  34. WTO (2013). World Trade Report 2013 Factors shaping the future of world trade. Geneva: WTO.

  35. WTO DISPUTE SETTLEMENT: DISPUTE DS431 China—Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds431_e.htm. Accessed Apr 2017.

  36. Zhang, W. (2016). Export restrictions: Time for new disciplines. Ph.D. thesis, Graduate Institute of International and Development Studies.

Download references

Acknowledgements

I am grateful to the editor, Gerald Willmann, and two anonymous reviewers for their useful comments on an earlier draft of this paper. Usual disclaimers apply.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Jean-Marc Malambwe Kilolo.

About this article

Verify currency and authenticity via CrossMark

Cite this article

Kilolo, JM.M. An elementary model of export tax war. Rev World Econ 154, 307–325 (2018). https://doi.org/10.1007/s10290-018-0314-8

Download citation

Keywords

  • Asymmetry
  • Endowment
  • Export tax
  • Import tariff
  • Free trade

JELL Classification

  • F15