Uniform Versus Discriminatory Tariffs

We analyze the non-cooperative interaction between two foreign ex-porting countries producing differentiated products and one domestic im-porting country when governments use optimal policies to maximize wel-fare. The analysis extends the model of Liao and Wong (2006) to include product differentiation, asymmetric costs, and Bertrand competition. For identical exporting countries we demonstrate that the importing country always prefers a uniform tariff regime while the two exporting countries prefer a discriminatory tariff regime for any degree of product differenti-ation and for Bertrand competition. If countries are asymmetric in terms of production cost then the higher-cost exporter always prefers the dis-criminatory regime but the lower-cost exporter prefers the uniform regime if there is a significant cost differential. With the cost asymmetry the an-nouncement of a uniform tariff regime by the importer is not a credible strategy since there is an incentive to deviate to discrimination. This implies an international body can play a role in ensuring that tariff agree-ments are respected