Optimal Trade Policies and Labor Markets

We provide a general formula for optimal unilateral policies in multi-sector, general-equilibrium Ricardian models with various widely adopted labor market specifications. Sector-specific tariffs are summarized by a matrix of partial supply elasticities and the share of Home’s import in foreign incomes, reflecting Home’s import market power. Sector-specific export taxes depend on trade elasticities and Home’s market share in foreign consumption, reflecting Home’s export market power. Home imposes higher tariffs or export taxes on sectors with larger market powers. We apply the general formula to specific cases: perfectly mobile labor, imperfectly mobile labor across sectors, Ricardian-Roy models, and inefficient labor markets.