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.
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Notes
In KR (1988) pure exchange model, size asymmetry is captured by differences in countries’ endowments of both goods.
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).
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.
Note that in Felbermayr et al. (2013), size is measured by both population size and productivity.
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.
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.
The imposition of export restrictions on CRMs ensures the supply of natural resources to domestic processing industries (Fung and Korinek 2013).
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).
Since import tariffs are equivalent to export taxes (the ‘Lerner symmetry’), countries cannot apply both trade policies at the same time.
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)
It is easily verified that quantities consumed correspond to KR (1988) when \(a=b=0\) and \(s=t=1\).
In fact, no trade occurs if \(\gamma ,\mu <1/2\). This inequality is called hereafter the feasibility condition.
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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.
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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
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DOI: https://doi.org/10.1007/s10290-018-0314-8