Tariff Reform in the Presence of Sector-Specific Distortions

The problem of choosing second-best trade policies is modified by including sector-policies as well as tariffs. Formulae for the optimal tariff and sector-specific subsidy are derived and used to study the design of optimal policy menus. The theory is applied to a computable general equilibrium model of the U.S. economy which emphasizes agriculture. The model suggests that non-agricultural distortions do not provide a second-best argument for substantial levels of agricultural protection.