Tariff design with varying degrees of commitment

Abstract

This paper provides a novel perspective on the dynamics of infant industry protection. Trade policies are analyzed when the industrial sector generates positive externalities in production, and there are adjustment costs to changing production between sectors. If the government is able to precommit to its future tariff schedule, the welfare maximizing policy is to maintain a positive tariff forever, even after the steady state is reached. However, if no precommitment is possible, the only time-consistent policy is zero tariff always. The case with precommitment for a limited period of time is also analyzed. (C) 1999 Elsevier Science B,V. All rights reserved.