A Dynamic Theory of Optimal Tariffs

The classic tariff formula states that the optimal unilateral tariff equals the inverse of the foreign export supply elasticity. We generalize this result and show that an intertemporal tariff formula characterizes the efficient tariff in a large class of dynamic heterogeneous agent (HA) economies with multiple goods. Intertemporal export supply elasticities and relative tariff revenue weights are sufficient statistics for the optimal tariff that decentralizes the efficient allocation. We also develop a general theory of second-best optimal tariffs. In dynamic HA incomplete markets economies, Ramsey optimal tariffs trade off intertemporal terms of trade manipulation against production efficiency, risk-sharing, and redistribution. Intertemporal export supply elasticities and relative tariff revenue weights remain sufficient statistics for the intertemporal terms of trade manipulation motive of second-best optimal tariffs. We apply our results to a quantitative heterogeneous agent New Keynesian (HANK) model with trade.