Optimal Tariff and Endogenous Drivers for Trade Liberalization

Trade liberalization requires institutional coordination and openness, and is driven by a multitude of factors. This paper simulates endogenous optimal tariffs under different model structures to uncover the underlying drivers of trade liberalization. Parametric calibration and simulation methods based on the numeric general equilibrium model are employed to estimate the optimal tariff rates of countries with and without trade retaliation. Then, near-reality assumptions are added into the standard general equilibrium model structure, including the cross-border capital flow, multi-country assumption and trade cost, to simulate decreasing optimal tariff rates. The simulation results suggest that world economic development has increased the economic ties and interdependence among nations, making trade liberalization an endogenous optimal choice. The backlash against globalization in recent years is motivated by short-term factors, but will not persist in the long run since it goes against the law of economic growth and socio-economic development.