The Optimal Tariff, Time Consistency and Immiserising Growth in a Large Country

The Optimal Tariff, Time Consistency and Immiserising Growth in a Large Country

It is well-known that immiserising growth cannot occur in a large, non-distorted economy that employs its optimal tariff. However, if production decisions are made before tariffs are irrevocably set, then the conventional optimal tariff is not time-consistent. We show that if a large country employs its time-consistent optimal tariff, then ultra-import biased domestic growth can be immiserising both for the large country and for its foreign trading partners. We also show that if the large country employs its second-best domestic production tax on importables, then immiserising growth cannot occur.