Working Paper: CEPR ID: DP15697
Authors: Lorenzo Caliendo; Robert 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.
Keywords: trade policy; monopolistic competition; gains from trade; input-output linkages
JEL Codes: F12; F13; F17; F61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal tariff (t_opt) (H21) | relative monopoly distortion (m_ti) (D42) |
| optimal tariff (t_opt) (H21) | effects of roundabout production (r_ti) (R41) |
| relative monopoly distortion (m_ti) (D42) | optimal tariff (t_opt) (H21) |
| effects of roundabout production (r_ti) (R41) | relative monopoly distortion (m_ti) (D42) |
| optimal tariff (t_opt) (H21) | economic welfare (D69) |
| optimal tariff (t_opt) lower (H21) | double marginalization (J79) |