Document Type

Working Paper

Publication Date

11-2016

JEL Codes

F13

Working Paper Number

2016-04

Abstract

This paper shows that the presence of inframarginal exporters can itself be a reason for a positive optimal tariff. 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, even a small importing country with no world market power has an incentive to optimally impose a tariff. In the limit, as either firm heterogeneity or the fixed costs of exporting vanish – so that there are no inframarginal firms – the optimal tariff approaches zero. The importing country is able to benefit from a tariff because part of the burden falls on the exporter rents earned by foreign inframarginal firms.

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Economics Commons

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