TY - JOUR AU - Broda,Christian AU - Limão,Nuno AU - Weinstein,David TI - Optimal Tariffs: The Evidence JF - National Bureau of Economic Research Working Paper Series VL - No. 12033 PY - 2006 Y2 - February 2006 UR - http://www.nber.org/papers/w12033 L1 - http://www.nber.org/papers/w12033.pdf N1 - Author contact info: Christian Broda 40 W 57th street Floor 25th New York, NY 10019 Tel: 917-214-0301 E-Mail: broda@duquesne.com Nuno Limao Department of Economics University of Maryland 3105 Tydings Hall College Park, MD 20742 Tel: 301/405-7842 Fax: 301/405-3542 E-Mail: limao@econ.umd.edu David Weinstein Columbia University, Department of Economics 420 W. 118th Street MC 3308 New York, NY 10027 Tel: 212/854-6880 Fax: 212/854-8059 E-Mail: dew35@columbia.edu AB - The theoretical debate over whether countries can and should set tariffs in response to the foreign export elasticities they face goes back to Edgeworth (1894). Despite the centrality of the optimal tariff argument in trade policy, there exists no evidence about whether countries actually exploit their market power in trade by setting higher tariffs on goods that are supplied inelastically. We estimate disaggregate foreign export supply elasticities and find evidence that countries that are not members of the World Trade Organization systematically set higher tariffs on goods that are supplied inelastically. The typical country in our sample sets tariffs 9 percentage points higher in goods with high market power relative to those with low market power. This large effect is of a magnitude similar to the average tariffs in the data and market power explains more of the tariff variation than a commonly used political economy variable. The result is robust to the inclusion of other determinants of tariffs and a variety of model specifications. We also find that U.S. trade restrictions that are not covered by the WTO are significantly higher in goods where the U.S. has more market power. In short, we find strong evidence that these importers have market power and use it in setting non-cooperative trade policy. ER -