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A Second-best Argument for Low Optimal Tariffs

Author

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  • Lorenzo Caliendo
  • Robert C. Feenstra
  • John Romalis
  • Alan M. Taylor

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.

Suggested Citation

  • Lorenzo Caliendo & Robert C. Feenstra & John Romalis & Alan M. Taylor, 2021. "A Second-best Argument for Low Optimal Tariffs," NBER Working Papers 28380, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28380
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    References listed on IDEAS

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    Cited by:

    1. Jung, Benjamin & Kohler, Wilhelm, 2021. "Input-output linkages and monopolistic competition: Input distortion and optimal policies," Hohenheim Discussion Papers in Business, Economics and Social Sciences 06-2021, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    2. Antrà s, Pol & Chor, Davin, 2021. "Global Value Chains," CEPR Discussion Papers 15908, C.E.P.R. Discussion Papers.
    3. Heiland, Inga & Kohler, Wilhelm, 2022. "Heterogeneous workers, trade, and migration," European Economic Review, Elsevier, vol. 144(C).
    4. Pol Antràs & Teresa C. Fort & Agustín Gutiérrez & Felix Tintelnot, 2022. "Trade Policy and Global Sourcing: An Efficiency Rationale for Tariff Escalation," NBER Working Papers 30225, National Bureau of Economic Research, Inc.
    5. Caliendo, Lorenzo & Feenstra, Robert C. & Romalis, John & Taylor, Alan M., 2023. "A second-best argument for low optimal tariffs on intermediate inputs," Journal of International Economics, Elsevier, vol. 145(C).
    6. Lorenzo Caliendo & Robert C. Feenstra & John Romalis & Alan M. Taylor, 2023. "Tariff Reductions, Heterogeneous Firms, and Welfare: Theory and Evidence for 1990–2010," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(4), pages 817-851, December.

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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts

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