PROTECTIVE AND REVENUE RAISING TRADE TAXES: THEORY AND AN APPLICATION TO INDIA

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This paper lays out an analytical framework which is general enough to encompass two prominent approaches to trade policy analysis in developing countries. These are (1) the Ramsey-Samuelson-Diamond-Mirrlees public finance tradition as applied to open economies and (2) the effective protection tradition stemming from the work of Balassa and Corden. Such a unified perspective emphasizes the critical role of assumptions about domestic fiscal instruments in the appropriateness of trade policy advice. The paper obtains analytical characterizations of desirable protective and revenue-raising trade taxes in various circumstances and, inter alia, identifies directions of reform. The quantitative significance of these ideas is illustrated by calculating such tariffs in a general equilibrium model of the Indian economy.