Lecture 9 - Import Tariffs under PC Empirics Flashcards
(10 cards)
How does membership in the GATT-WTO system affect a country’s ability to set tariffs?
Members do not have full unilateral autonomy in tariff-setting; their tariffs are the outcome of negotiated bargains and must be below their “bound” commitments
What is the objective of the social planner in the Broda, Limao, and Weinstein (BLW, 2008) model?
To set tariffs to maximize social welfare. The model considers a large number of product markets in a perfectly competitive environment
What happens to “quasi-rents” accruing to owners of a specific factor in the import-competing sector when an import tariff is imposed?
The quasi-rent per unit of output increases, and the volume of output expands, leading to an overall increase in quasi-rents
What two key effects are captured in the first-order condition for setting optimal tariffs in the BLW model?
- Domestic distortions (like DWL triangles).
- The terms of trade effect
How does the optimal tariff rate relate to the export supply elasticity of a product according to the BLW optimal tariff formula?
As export supply becomes more inelastic, the optimal tariff increases
What “simultaneity problem” do economists typically face when trying to estimate demand or supply elasticities from observed data?
They only observe equilibrium prices and quantities, making it difficult to disentangle shifts in demand curves from shifts in supply curves without an exogenous instrument
How did Broda, Limao, and Weinstein (2008) address the simultaneity problem in their empirical strategy?
They simultaneously estimated import demand and export supply elasticities from trade data by exploiting variation in expenditure shares and prices across varieties and over time, a method related to Feenstra (1994), without needing an external instrument
In the context of BLW’s empirical work, what is the distinction between a “Good” and a “variety”?
A “Good” is a category of items (e.g., shoes, televisions).
A “variety” refers to an export-source for that good (e.g., German shoes, Mexican shoes are varieties of the “shoes” good)
What does the finding that countries set higher tariffs on more inelastically supplied goods suggest about their behavior?
It suggests that importing countries attempt to exert their market power by raising tariffs on goods where foreign suppliers are less responsive to price changes
Based on BLW’s findings from the 1990s, what is the implication for who paid the tariff in the 2018 US-China trade war?
Because the US is large and China’s export supply was expected to be relatively inelastic, Chinese exporters would likely pay at least part of the US tariff
