The Optimal Degree of Reciprocity in Tariff Reduction

Pao-Li Chang ()

East Asian Economic Review, 2020, vol. 24, issue 3, 237-252

Abstract: This paper characterizes the optimal reciprocal trade policy in the environment of Melitz (2003) with firm productivity heterogeneity. In particular, without making parametric assumptions on firm productivity distribution, this paper derives the optimal degree of reciprocal tariff reductions that maximize the world welfare. A reciprocal import subsidy raises the industry productivity, lowering aggregate price; a reciprocal import tariff helps correct the markup distortion, increasing nominal income. With all the conflicting effects of import tariffs on welfare considered, the optimal degree of reciprocity in multilateral tariff reduction is shown to be free trade.

Keywords: Firm Heterogeneity; Reciprocal Trade Policy; Import Tariff; Markup Distortion; Aggregate Productivity (search for similar items in EconPapers)
JEL-codes: F12 F13 F15 (search for similar items in EconPapers)
Date: 2020
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https://dx.doi.org/10.11644/KIEP.EAER.2020.24.3.378 Full text (application/pdf)

Related works:
Working Paper: The Optimal Degree of Reciprocity in Tariff Reduction (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:eaerev:0378

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