Get access

Race-to-the-bottom Tariff Cutting

Authors


  • The author thanks Richard Baldwin, David von Below, Marius Bruhlhart, Ron Davies, Marco Fugazza, Torfinn Harding, Marcelo Olarreaga, Pierre Picard, Frédéric Robert-Nicoud, Matthias Rieger, Tony Venables, as well as seminar participants in Geneva, Luxembourg, Nottingham and Lausanne for very helpful comments.

Abstract

Unilateral tariff liberalization accounts for the lion's share of trade liberalization since the 1980s and has accompanied the most successful trade-led development model of the past 50 years, “Factory Asia”. Understanding what drove this liberalization is therefore crucial to our grasp of the process of economic development. This paper provides empirical evidence for seven Asian emerging economies from 1988 to 2006 consistent with a tariff race to the bottom driven by a competition for foreign direct investment (FDI). The identification is two-pronged. First, it is shown that tariffs on parts and components, intermediates and capital goods, crucial locational determinants for assembly firms, are correlated in competitive space, i.e. across countries at a similar level of development, but not across all countries. Second, it is shown that the tariff correlation in competitive space is significantly higher for inputs than consumer goods.

Get access to the full text of this article

Ancillary