Tariffs, interest rates, and the trade balance in the world economy

A two-commodity intertemporal framework is used to show that, in contrast to the conventional wisdom, both permanent and temporary tariffs may worsen the trade balance of a large country. For a temporary tariff the key condition for this result is a low intertemporal elasticity of substitution in consumption. When a temporary tariff worsens the trade balance the world real interest rate must fall if the tariff-imposing country is running a deficit and rise if it is running a surplus. Temporary tariffs can only worsen the trade balance of a surplus country when international differences in tastes are important. © 1989.

Duke Scholars

Author Kent P. Kimbrough Economics