Endogenous Tariff Formation

Interest in the process of tariff formation has grown considerably during the last decade. Robert Baldwin (1976, 1982), William Brock and Stephen Magee (1978, 1980), as well as Ronald Findlay and Stanislaw Wellisz (1982) have suggested alternative models for studying the economic and political forces that interact in determining a country's actual tariff structure.' The underlying premise of these studies is that political decisions on tariff rates are reflections of the selfish economic interests of voters, lobbying groups, politicians, or other decision makers in trade policy matters.2'3 Brock and Magee, as well as Findlay and Wellisz, treat tariff formation as a noncooperative game among competing economic interest groups.4 In Brock and Magee's papers, the tariff positions of opposing political parties are explained, where each party maximizes its chances of being elected, and the probability of reelection hinges on contributions from tariff-sensitive lobbying groups. In Findlay and Wellisz, the economic interests of land and capital owners are opposed, with labor standing on the sidelines. Baldwin, on the other hand, postulates majority voting by owners of productive factors. Hence, Baldwin introduces a collective decision rule to tariff determination which plays a major role in the public choice literature.5 Specifically, he argues that accepted optimal trade policy prescriptions, such as free trade for a small country, would be voted in by factor owners if voters' tastes were homothetic and there were no restrictions on income redistributions, no voting and information costs, and no possibilities for logrolling. However, when these ideal assumptions are gradually removed, Baldwin (1976, p. 71) suggests that actual tariff rates are decisively affected by economic groups which are large in size and whose potential gains or losses are substantial. Baldwin's discussion is rich in detail and offers many valuable insights. Most important, it breaks new ground in suggesting determinants of actual tariffs, such as the distribution of factors of production, the existence of voting costs, and the specific nature of the underlying economic and political system. The purpose of this paper is to study some of these alternative determinants of tariff rates in a rigorously formulated general equilibrium model. In particular, the paper attempts to evaluate the dependence of actual tariff rates on factor-ownership distribution, voter eligibility and participation rules, and the degrees of factor mobility and industry diversification in the economy. The standard assumption on factor ownership, which also is adopted by Baldwin (1982, p. 268), states that each person owns one factor of production only. This implies that all owners of a given factor form a *Department of Economics, University of Cincinnati, Cincinnati, OH 45221. Comments by John Pomery, Raymond Riezman, and Ronald Jones are greatly appreciated. 'In addition to the literature on endogenous tariff formation, there are a number of authors (for example, Jagdish Bhagwati, 1982; Arye Hillman, 1982; and Elias Dinopoulos, 1983), who discuss endogenous tariff adjustments in response to exogenous changes in the international terms of trade. How the initial tariff rate was selected is, however, not part of their decision problem. Also there is a growing empirical tlterature on changing tariff structures of various countries, such as the works by Jonathan Pincus (1975), Richard Caves (1976), G. K. Helleiner (1977), as well as Howard Marvel and Edward Ray (1983). 2The relationship between public policymaking and economic interests is widely discussed in the public choice literature, such as in Anthony Downs (1957), James Buchanan and Gordon Tullock (1962), and Dennis Mueller (1979). 3A quite different approach at explaining tariff structures has been used by Edward Ray (1974). 4For extensions of these modes, see Leslie Young and Magee (1983), Wellisz-Findlay (1983), and Wellisz and John Wilson (1983). 5For a thorough discussion of majority voting rules, see Duncan Black (1948a,b) and Mueller.