Theory and evidence for the last two decades of tariff reductions

April 26, 2017

Tariff barriers today are small on average, suggesting only limited welfare gains from their removal. This column argues, however, that the current generation of standard trade models have missed an important source of gains from trade by neglecting the more complex case of a world with production linkages and multiple sectors. Under monopolistic competition, the effects of firm entry may be so powerful, that optimal tariffs are not positive but negative. Even the removal of small positive tariffs could thus produce significant welfare gains.

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Topics: WORLD TRADE ORGANIZATION (WTO) TARIFF LIBERALIZATION TARIFFS

Agreements: TRANS-PACIFIC PARTNERSHIP (TPP) TRANSATLANTIC TRADE AND INVESTMENT PARTNERSHIP (TTIP)

Authors: LORENZO CALIENDO ROBERT FEENSTRA JOHN ROMALIS ALAN TAYLOR

Publishing Institution: VOX - CEPR'S POLICY PORTAL

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