Working Paper: NBER ID: w28380
Authors: 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.
Keywords: optimal tariffs; trade theory; heterogeneous firms; roundabout production
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 |
|---|---|
| tariffs (F13) | pricing of domestic goods (P22) |
| tariffs (F13) | incentives for firms to adjust production strategies (D21) |
| absence of subsidies (H29) | optimal tariff (H21) |
| double marginalization (J79) | higher prices for consumers and firms (L11) |
| roundabout production (D20) | monopoly distortion in traded sector (F12) |
| monopoly distortion in traded sector (F12) | lower tariff (F13) |
| tariffs (F13) | economic welfare (D69) |