CAN THE OPTIMAL TARIFF BE ZERO FOR A GROWING LARGE COUNTRY?

Abstract

AbstractCan the optimal tariff be zero for a growing large country? To pursue the possibility, we extend the Rivera‐Batiz–Romer lab‐equipment model of endogenous technological change to include asymmetric countries, import tariffs, and either homogeneous or heterogeneous firms. Each country's domestic revenue share is a sufficient statistic for its long‐run growth rate, but it is not for its long‐run welfare. A unilateral tariff reduction by either country always increases the balanced growth rate. A zero tariff is locally optimal for a country under a mild condition, which is automatically satisfied at a symmetric balanced growth path with the zero tariff.