Comparative Advantage and Optimal Trade Policy
47 Pages Posted: 2 Dec 2013
There are 2 versions of this paper
Comparative Advantage and Optimal Trade Policy
Date Written: December 2013
Abstract
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.
Keywords: Comparative Advantage, Ricardian Model, Trade Policy
JEL Classification: F10, F11, F13
Suggested Citation: Suggested Citation