A Second-best Argument for Low Optimal Tariffs

Alan Taylor, Lorenzo Caliendo, Robert Feenstra and John Romalis

No 15697, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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, the double- marginalization of domestic markups creates a strong incentive to lower the optimal tariff on imported inputs. In a 186-country quantitative model, the median optimal tariff is 10%, and negative for five countries, as compared to 27% in manufacturing from the one-sector, optimal tariff formula without roundabout production.

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: 2021-01
New Economics Papers: this item is included in nep-int and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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