A second-best argument for low optimal tariffs on intermediate inputs

Lorenzo Caliendo, Robert Feenstra, John Romalis and Alan M. Taylor

Journal of International Economics, 2023, vol. 145, issue C

Abstract: We derive a new formula for the optimal uniform tariff in a small-country, heterogeneous-firm model with roundabout production and a nontraded good. Tariffs are applied on imported intermediate inputs. First-best policy requires that markups on domestic intermediate inputs are offset by subsidies. In a second-best setting where such subsidies are not used, roundabout production and the monopoly distortion in the traded sector create strong incentives to lower the optimal tariff on imported inputs. In a quantitative version of our two-sector small open economy, we find that the optimal tariff is lowered under nearly all parameter values considered, and can be negative.

Keywords: Trade policy; Monopolistic competition; Gains from trade; Input–output linkages (search for similar items in EconPapers)
JEL-codes: F12 F13 F17 F61 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:145:y:2023:i:c:s0022199623001101

DOI: 10.1016/j.jinteco.2023.103824

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