Pawel M. Krolikowski and Andrew H. McCallumWe study tariffs in a general equilibrium dynamic model with search frictions between heterogeneous exporting producers and importing retailers. We show the model has a unique equilibrium and analytically characterize home unilateral import tariffs that maximize welfare given a passive foreign country. Search frictions add two terms to the standard optimal tariff expression: One lowers tariffs when contact rates are low; another when private export costs exceed social opportunity costs. Search frictions also introduce new incentives to subsidize imports due to market thickness effects. We calibrate our baseline to U.S. and Chinese 2016 data. We compare this baseline to a counterfactual with international search costs reduced to domestic levels but with all other parameters fixed. We find that higher baseline search costs reduce optimal U.S. unilateral and Nash tariffs and attenuate welfare responses to tariff changes.
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