Arnaud Costinot (MIT) & Iván Werning (MIT), Should We Tax Trade? A Pigouvian Perspective, NBER Working Paper No. 35461 (July 2026):
We develop a simple and intuitive Pigouvian perspective on optimal trade policy. Our approach unifies a wide range of rationales for taxing trade, from the classical optimal tariff argument to contemporary debates about global carbon emissions and geopolitics. We also clarify when trade policy intervention is warranted and when alternative domestic instruments should be used instead.
From the conclusion:
There is more to optimal trade policy than free trade. Mercantilist fallacies aside, we have shown that the same Pigouvian perspective can be used as a unifying framework to understand when trade policy intervention is warranted and when it is not. From the classical optimal tariff argument of Mill (1844) and Torrens (1844) to contemporary debates about global carbon emissions and geopolitics, all the formulas presented in this article derive from the same basic principle: if domestic firms and consumers do not internalize the marginal impact of their imports on social welfare, they should be asked to pay for it. Despite the complexity of general-equilibrium interactions, optimal trade policy can be expressed as a function of a few sufficient statistics that do not depend on the details of such interactions.
Related TaxProf Blog coverage:
- Trump Threatens 100% Tariffs in Response to European DSTs (June 27, 2026)
- Section 122 Tariffs Challenged in the Court of International Trade (Mar. 11, 2026)
