Strategic Corporate Social Responsibility and Tariff Policies: The Timing of Commitments and Policy Implications

Abstract

In the context of international trade, we explore the role of strategic commitments by a local government concerning tariffs in the presence of firms’ corporate social responsibility (CSR) activities. We examine and compare committed tariff and time-consistent tariff regimes when a domestic or foreign firm engages in CSR activities, respectively. We demonstrate that under domestic CSR, the committed tariff yields lower optimal tariffs and higher strategic CSR than the time-consistent tariff, resulting in higher welfare and lower profits for the CSR firm. Under foreign CSR, when firms’ products are more independent (substitutable), the committed tariff results in lower (higher) optimal tariffs, higher (lower) strategic CSR, and higher (lower) welfare than the time-consistent tariff. We also examine an endogenous choice of commitment and find that the committed tariff is a desirable equilibrium under domestic CSR, whereas the time-consistent tariff may be a desirable equilibrium under foreign CSR when firms’ products are more independent.