The Theory of Trade Policy and Reform

Abstract

Historically, trade taxes have been an important source of government revenue in subsistence-oriented economies with large informal sectors. As countries developed and economic activity became more market-oriented, governments sourced revenue from broader, more efficient tax bases. But trade taxes remained, with protection of domestic import-competing activity, rather than revenue, becoming their primary motivation. This shift of motivation also facilitated the substitution of alternative policies, quantitative restrictions for example, which would limit import competition without necessarily generating revenue.

We thank Hartmut Egger and Pascalis Raimondos-Møller for helpful comments. This work was substantially completed while the authors were at the University of Nottingham. We gratefully acknowledge financial support from the Leverhulme Trust under programme grant F/00 114/AM.