Interdependence of Trade Policies in General Equilibrium

Abstract

We characterize the optimal trade tax/subsidy schedule in generalequilibrium multiple-sector gravity models and find that: ( i ) The optimal tariffs are uniform across sectors, despite sectoral variations in trade elasticities, transport costs and demand characteristics; ( ii ) The optimal export subsidy for a sector is increasing in that sector’s trade elasticity. Moreover, trade policies are interdependent: ( iii ) Import tariffs across sectors are complementary and ( iv ) Import policy is only an imperfect substitute for export policy. These policy interdependencies play an important role in the optimal design of trade agreements and provide a novel perspective on the WTO’s ban on export subsidies. Fitting our model to trade data, we show that these policy interdependencies are also quantitatively significant. Finally, ( v ) non-revenue trade barriers (such as import bans) could be optimal in a subset of sectors.