Working Paper: NBER ID: w19689
Authors: Arnaud Costinot; Dave Donaldson; Jonathan Vogel; Ivan Werning
Abstract: The theory of comparative advantage is at the core of neoclassical trade theory. Yet we know little about its implications for how nations should conduct their trade policy. For example, should import sectors with weaker comparative advantage be protected more? Conversely, should export sectors with stronger comparative advantage be subsidized less? In this paper we take a first stab at exploring these issues. Our main results imply that in the context of a canonical Ricardian model, optimal import tariffs should be uniform, whereas optimal export subsidies should be weakly decreasing with respect to comparative advantage, reflecting the fact that countries have more room to manipulate prices in their comparative-advantage sectors. Quantitative exercises suggest substantial gains from such policies relative to simpler tax schedules.
Keywords: comparative advantage; optimal trade policy; Ricardian model
JEL Codes: F10; F11; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal import tariffs should be uniform (F13) | domestic welfare is maximized (D69) |
| optimal export subsidies should be weakly decreasing with respect to comparative advantage (F14) | countries have more room to manipulate prices in their comparative-advantage sectors (F14) |
| structure of optimal trade taxes directly correlates with comparative advantage (F11) | trade welfare outcomes (F10) |