Micro to Macro: Optimal Trade Policy with Firm Heterogeneity

61 Pages Posted: 15 Feb 2016

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

Andrés Rodríguez-Clare

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Iván Werning

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

Date Written: February 2016

Abstract

The empirical observation that “large firms tend to export, whereas small firms do not” has transformed the way economists think about the determinants of international trade. Yet, it has had surprisingly little impact about how economists think about trade policy. In this paper, we characterize optimal trade policy in a generalized version of the trade model with monopolistic competition and firm-level heterogeneity developed by Melitz (2003). At the micro-level, we find that optimal import taxes discriminate against the most profitable foreign exporters, while optimal export taxes are uniform across domestic exporters. At the macro-level, we demonstrate that the selection of heterogeneous firms into exporting tends to create aggregate nonconvexities that dampen the incentives for terms-of-trade manipulation, and in turn, the overall level of trade protection.

Suggested Citation

Costinot, Arnaud and Rodríguez-Clare, Andrés and Werning, Ivan, Micro to Macro: Optimal Trade Policy with Firm Heterogeneity (February 2016). NBER Working Paper No. w21989, Available at SSRN: https://ssrn.com/abstract=2732466

Arnaud Costinot (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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University of California, San Diego (UCSD) - Department of Economics ( email )

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Andrés Rodríguez-Clare

University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Ivan Werning

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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