Externalities in international trade: The case for differential tariffs

This paper examines the economic justification for the use of differential tariffs to control for positive and negative externalities embodied in traded products. In particular, economic efficiency requires that taxes and subsidies should be applied to internalize external costs or benefits. It is argued that products such as timber, minerals, and agricultural products that produce large negative environmental externalities should be differentially tariffed to either provide an incentive to cease destructive practices, or provide funding for amelioration. Examples from the mining and agricultural sectors are used to demonstrate the magnitude of tariffs required to offset the estimated environmental damage. Products with embedded cultural content are used as examples of exports that may possess positive externalities, and should be subject to a subsidy.