IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/28380.html

A Second-best Argument for Low Optimal Tariffs

Author

Listed:
  • 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
    Note: ITI
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w28380.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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. Lloyd, Simon P. & Marin, Emile A., 2024. "Capital controls and trade policy," Journal of International Economics, Elsevier, vol. 151(C).
    3. Pol Antràs & Teresa C. Fort & Agustin Gutierrez & Felix Tintelnot, 2022. "Trade Policy and Global Sourcing: An Efficiency Rationale for Tariff Escalation," NBER Working Papers 30225, National Bureau of Economic Research, Inc.
    4. Heiland, Inga & Kohler, Wilhelm, 2022. "Heterogeneous workers, trade, and migration," European Economic Review, Elsevier, vol. 144(C).
    5. Tomohiro Ara, 2023. "Two‐sided heterogeneity: New implications for input trade," Review of International Economics, Wiley Blackwell, vol. 31(3), pages 1032-1067, August.
    6. 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).
    7. 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.
    8. Pol Antràs & Davin Chor, 2021. "Global Value Chains," NBER Working Papers 28549, National Bureau of Economic Research, Inc.
    9. Bandyopadhyay, Subhayu & Basu, Arnab K. & Chau, Nancy H. & Mitra, Devashish, 2025. "On terms of trade, offshoring ties, and the enforcement of trade agreements," Journal of Economic Behavior & Organization, Elsevier, vol. 238(C).

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:28380. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.