Endogenous Export Taxation under Fixed and Flexible Import Tariff Regimes

Abstract The European Union and the U.S.A. propelled an agenda on a free-trade agreement1, whereas “The Pacific Alliance” launched a treaty of 90% obliteration on merchandise trade tariffs2. The impact of globalization does not merely impoverish international trade instruments, but also tends to significantly eradicate them. Consequently, as a part of our thesis we developed the theory of endogenous export taxation in order to generate substitute and auxiliary trade policies. The main conclusion is that fiscal policies and specifically the enforcement of a tax on production, can affect an exporting industry, similarly to an export tax. The aforementioned result is accurate under fixed and flexible import tariff regimes. The model examines industries exhibiting increasing, constant and decreasing returns to scale, simultaneously with elastic, inelastic and isoelastic export supply curves. The key result is that if an exporting industry supplies a commodity inelastically, then an endogenous export tax will increase the producer surplus despite the fact that the cost increases. The latter conclusion is examined for perfect and imperfect market conditions, with and without the presence of fixed cost. The model uses a paradox and techniques completely different and innovative compared to the formal trade theory. To conclude, as a part of the microeconomic implications, we proved that the existence of fixed cost does not necessarily lead to increasing returns to scale; a contradictory result according to the fundamental microeconomic theory.