The Optimal Degree of Reciprocity in Tariff Reduction

16 Pages Posted: 9 Nov 2020

See all articles by Pao‐Li Chang

Pao‐Li Chang

Singapore Management University

Date Written: September 30, 2020

Abstract

This paper characterizes the optimal reciprocal trade policy in the environment of Melitz (2003) with firm productivity heterogeneity. In particular, without making parametric assumptions on firm productivity distribution, this paper derives the optimal degree of reciprocal tariff reductions that maximize the world welfare. A reciprocal import subsidy raises the industry productivity, lowering aggregate price; a reciprocal import tariff helps correct the markup distortion, increasing nominal income. With all the conflicting effects of import tariffs on welfare considered, the optimal degree of reciprocity in multilateral tariff reduction is shown to be free trade.

Keywords: Firm Heterogeneity, Reciprocal Trade Policy, Import Tariff, Markup Distortion, Aggregate Productivity

JEL Classification: F12, F13, F15

Suggested Citation

Chang, Pao‐Li, The Optimal Degree of Reciprocity in Tariff Reduction (September 30, 2020). East Asian Economic Review Vol. 24, No. 3 (September 2020) 237-252, DOI:10.11644/KIEP.EAER.2020.24.3.378, Available at SSRN: https://ssrn.com/abstract=3724762

Pao‐Li Chang (Contact Author)

Singapore Management University

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

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