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The Optimal Degree of Reciprocity in Tariff Reduction

By Pao-li Chang


This article clarifies the roles played by trade policy, in contrast with iceberg transport cost, in the popular setting of Melitz (2003), and characterizes the optimal reciprocal trade policy in such a setting. I show that import tariffs and iceberg transport cost are not equivalent in the strength of their traderestricting effects and their welfare implications. With all the conflicting effects of import tariffs on welfare considered, the optimal degree of reciprocity in multilateral tariff reduction turns out to be free trade.\u

Topics: JEL Classi…cation, F12, F13. Key Words, Firm Heterogeneity, Reciprocal Trade Policy
Year: 2009
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