A second-best argument for low optimal tariffs on intermediate inputs

Lorenzo Caliendo, Robert C. Feenstra, John Romalis, Alan M. Taylor

Research output: Contribution to journalArticlepeer-review

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, roundabout production and the monopoly distortion in the traded sector create strong incentives to lower the optimal tariff on imported inputs. In a quantitative version of our two-sector small open economy, we find that the optimal tariff is lowered under nearly all parameter values considered, and can be negative.
Original languageEnglish
Article number103824
Pages (from-to)1-18
Number of pages18
JournalJournal of International Economics
Volume145
DOIs
Publication statusPublished - Nov 2023

Keywords

  • Trade policy
  • Monopolistic competition
  • Gains from trade
  • Input–output linkages

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