TAXATION OF FOREIGN-CAPITAL AND THE OPTIMUM TARIFF

Abstract

Given that the host country has the monopoly power in the exportable market, this paper has been concerned with the optimum tariffs in a specific model where the internationally mobile capital is specific to the import-competing sector. The distinctive feature of this paper is approaching the optimal trade policies as an illustration of the theory of second-best. The second-best tariff rate depends on the given rate of tax on foreign capital yields. When the tax on foreign investment is greater (smaller) than the optimum rate, a tariff greater (smaller) than the traditional formula is required to correct the distortion and restore the equilibrium.