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Should Smaller Countries Be More Protectionist? The Diversification Motive for Tariffs
Author(s) -
Gaisford James,
Ivus Olena
Publication year - 2014
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12139
Subject(s) - diversification (marketing strategy) , protectionism , economics , context (archaeology) , international economics , risk aversion (psychology) , market power , international trade , microeconomics , financial economics , expected utility hypothesis , business , paleontology , marketing , biology , monopoly
This paper examines the diversification motive for tariffs under trade‐related uncertainty when there is incomplete international and domestic risk sharing. In the context of a two‐country Ricardian continuum‐of‐sectors model with shocks to foreign technologies or preferences, tariffs allow a country to mitigate external risk by diversifying across sectors. Given sufficiently high risk and risk aversion, the optimality of tariffs depends primarily on a country's ability to diversify, rather than its market power, such that small countries gain most.