"Buy domestic" campaigns and optimal tariffs

Abstract

This paper attempts to analyze the strategic use of optimal tariffs and to examine the effects of national bias on the optimal trade policy and social welfare in a two-country, two-good, price competition model derived from Neven et al. (1991). The major findings are as follows. (1) If all consumers prefer the domestic good, then "buy domestic" campaigns will decrease the prohibitive tariff rate and increase local welfare. (2) If at least some consumers prefer the foreign good, but not to a great extent, then "buy domestic" campaigns will not change the optimal tariff rate, but may improve local welfare. (3) When all consumers greatly prefer the foreign good, then promotion of "buy domestic" decreases the optimal tariff rate, but it cannot improve social welfare. With this framework, we also prove that "buy domestic" campaigns serve as a substitute for tariffs with respect to a strategic trade policy.