Document Type

Article

Publication Date

10-2017

JEL Codes

F13

Abstract

This paper shows that an importing country can have an incentive to impose a tariff to extract rents earned by foreign exporters even in a perfectly competitive setting. To demonstrate this, I develop a new model of international trade that incorporates fixed costs of exporting and firm heterogeneity within a perfectly competitive framework. In this setting, despite the fact that there are no pre-existing distortions, the optimal tariff is positive even for a small country with no world market power. In the limit, as either firm heterogeneity or the fixed costs of exporting vanish, the optimal tari approaches zero.

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