Tariffs, Time Preference, and the Current Account under Weakly Nonseparable Preferences

Incorporating weakly nonseparable preferences into the familiar time--preference model, the author emphasizes a role of steady--state welfare changes in determining the effect of permanent tariffs on the current account. The effect consists of a welfare effect, due to steady--state welfare changes, which is negative (positive) when preferences toward imports are more (less) wealth--enhanced than toward exports; and a substitution effect, which occurs only with initial distortion. Even without initial distortion, a marginal tariff has a first--order welfare effect on the current account. Its sign does not depend on whether impatience is increasing or decreasing in wealth. Copyright Blackwell Publishing Ltd. 2003