Tariffs and Goods-Market Search Frictions
We study uniform tariffs in a general equilibrium dynamic model with search frictions between heterogeneous exporting producers and importing retailers. We analytically characterize unilateral import tariffs that maximize domestic welfare. Search frictions lower these tariffs because of market thickness effects, which reinforce aggregate production nonconvexities. A calibration using 2016 U.S. and Chinese data suggests that optimal U.S. unilateral and Nash equilibrium tariffs with baseline search frictions are 10 ppt. below those in a model with reduced search frictions. Changes in welfare in response to changes in tariffs are smaller in the model with baseline search frictions than in the model with reduced frictions. In the Nash equilibrium with baseline search frictions, U.S. (Chinese) tariffs are 17 (8) ppt. higher and welfare is 0.1 (0.9) percent lower relative to 2016 tariff levels.
Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.
Suggested Citation
Krolikowski, Pawel M., and Andrew H. McCallum. 2025. “Tariffs and Goods-Market Search Frictions.” Federal Reserve Bank of Cleveland, Working Paper No. 25-03. https://doi.org/10.26509/frbc-wp-202503
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