Tariffs and Goods-Market Search Frictions

Pawel Krolikowski and Andrew McCallum

No 25-03, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We study uniform tariffs in a general equilibrium dynamic model with search frictions between heterogeneous exporting producers and importing retailers. We analytically characterize unilateral import tariffs that maximize domestic welfare. Search frictions lower these tariffs because of market thickness effects, which reinforce aggregate production nonconvexities. A calibration using 2016 U.S. and Chinese data suggests that optimal U.S. unilateral and Nash equilibrium tariffs with baseline search frictions are 10 ppt. below those in a model with reduced search frictions. Changes in welfare in response to changes in tariffs are smaller in the model with baseline search frictions than in the model with reduced frictions. In the Nash equilibrium with baseline search frictions, U.S. (Chinese) tariffs are 17 (8) ppt. higher and welfare is 0.1 (0.9) percent lower relative to 2016 tariff levels.

Keywords: optimal tariffs; trade policy; efficiency; search; welfare; social planner (search for similar items in EconPapers)
JEL-codes: C78 D62 D83 F12 F13 (search for similar items in EconPapers)
Pages: 79
Date: 2025-01-16
New Economics Papers: this item is included in nep-dge, nep-gth and nep-int
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DOI: 10.26509/frbc-wp-202503

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