Comparative Advantage and Optimal Trade Policy

47 Pages Posted: 2 Dec 2013

See all articles by Arnaud Costinot

Arnaud Costinot

Massachusetts Institute of Technology (MIT) - Department of Economics; University of California, San Diego (UCSD) - Department of Economics

Dave Donaldson

Massachusetts Institute of Technology (MIT); Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Bureau for Research and Economic Analysis of Development (BREAD)

Jonathan Vogel

UCLA; NBER

Iván Werning

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2013

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 explore these issues in the context of a canonical Ricardian model. Our main results imply that 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, Ricardian Model, Trade Policy

JEL Classification: F10, F11, F13

Suggested Citation

Costinot, Arnaud and Donaldson, Dave and Vogel, Jonathan and Werning, Ivan, Comparative Advantage and Optimal Trade Policy (December 2013). CEPR Discussion Paper No. DP9765, Available at SSRN: https://ssrn.com/abstract=2362314

Arnaud Costinot (Contact Author)

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Jonathan Vogel

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Ivan Werning

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