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The Optimal Degree of Reciprocity in Tariff Reduction

Author

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  • Chang, Pao-Li

    (School of Economics Singapore Management University)

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.

Suggested Citation

  • Chang, Pao-Li, 2020. "The Optimal Degree of Reciprocity in Tariff Reduction," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 24(3), pages 237-252, September.
    • Handle: RePEc:ris:eaerev:0378
    DOI: 10.11644/KIEP.EAER.2020.24.3.378
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    References listed on IDEAS

    as
    1. Demidova, Svetlana & Rodríguez-Clare, Andrés, 2009. "Trade policy under firm-level heterogeneity in a small economy," Journal of International Economics, Elsevier, vol. 78(1), pages 100-112, June.
    2. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
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    More about this item

    Keywords

    Firm Heterogeneity; Reciprocal Trade Policy; Import Tariff; Markup Distortion; Aggregate Productivity;
    All these keywords.

    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
    • F15 - International Economics - - Trade - - - Economic Integration

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