| The development of theoretical trade models that allow for heterogeneous firms has led to a recent literature that reexamines the effects of countries opening to trade in a new light. This dissertation comprises three essays that contribute to this recent literature. The first essay addresses a limitation in the current heterogeneous firm literature which requires symmetric changes in trade restrictions. I provide a tractable model that qualitatively maintains the results of these models but allows for asymmetric changes in trade restrictions, a necessary step towards studying strategic trade policy. In addition, I am able to rank the magnitudes of effects on product variety associated with changes in an ad valorem tariff, iceberg transport costs, and additional beachhead costs to become an exporter.;The second essay of this dissertation explores Nash tariffs in the presence of multinationals. By utilizing the model derived in the first essay, I am able to generate equilibria, with endogenously chosen tariffs, in which both pure exporters and multinationals coexist. I find that if multinationals are present in equilibrium the optimal tariff is lower than in the case where multinationals are excluded as a choice of firm structure. Moreover, I show that the socially optimal tariff is a subsidy, contrary to the standard optimum of free trade. Finally, I find the typical result that tariff competition results in inefficiently high tariffs.;The third essay of this dissertation empirically tests the implication of the second essay that the presence of foreign direct investment lowers a country's Nash tariff. It has been well established theoretically that a country's noncooperative Nash optimal tariff is equal to the inverse export supply elasticity. Recent research finds empirical evidence for the so-called "terms-of-trade" effect. However, little has been done to consider foreign direct investment in this rule. I adapt a theoretical model formulated by Blanchard and find empirical support for the claim that FDI lowers a country's noncooperative optimal tariff, using data on China before its accession to the World Trade Organization. |
