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Comparative Advantage and Optimal Trade Policy

date Date: May 1, 2014
date Author(s): Arnaud Costinot, Dave Donaldson, Jonathan Vogel, Iván Werning
date Affiliation: MIT - Columbia University

The theory of comparative advantage is at the core of neoclassical trade theory. Yet we
know little about its implications for how nations should conduct their trade policy.
For example, should import sectors with weaker comparative advantage be protected
more? Conversely, should export sectors with stronger comparative advantage be
subsidized less? In this paper we explore these issues in the context of a canonical
Ricardian model. Our main results imply that optimal import tariffs should be uniform,
whereas optimal export subsidies should be weakly decreasing with respect to
comparative advantage, reflecting the fact that countries have more room to manipulate
prices in their comparative-advantage sectors. Quantitative exercises suggest
substantial gains from such policies relative to simpler tax schedules.

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