A recent Federal Reserve discussion paper examines how search frictions between exporters and retailers influence optimal tariff policies. The authors build a dynamic general‑equilibrium model that includes heterogeneous exporting producers and importing retailers, and prove that a unique equilibrium exists. They derive conditions for a home country’s unilateral import tariff that maximizes welfare when the foreign country is passive. Search frictions add two effects: lower tariffs when contact rates are low, and when private export costs exceed social opportunity costs. The model also generates incentives to subsidize imports due to market thickness. Using U.S. and Chinese 2016 data, the paper calibrates the baseline and compares it to a counterfactual with reduced international search costs, finding that higher search costs lower optimal tariffs and dampen welfare gains.
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