Optimal tariffs

Trade Policy and Power Politics

Standard optimal tariff theory explains protection through terms-of-trade motives, but abstracts from geopolitical alignment and coercive power. We estimate foreign export supply elasticities for over 100 countries and show that military power is positively associated with tariff protection, even after controlling for standard market-power channels. To rationalize this pattern, we develop a model in which governments choose tariffs under the threat of conflict and alliances form endogenously. Military strength shapes disagreement payoffs and the set of tariff policies compatible with peace, yielding an augmented optimal-tariff formula with a terms-of-trade motive, a geopolitical-alignment wedge, and a peace-constraint shadow term.