CPGA Working Paper: Bilateral Import Demand Elasticities and Balanced Trade Protection

Abstract

We propose a theory-based tariff index - the Balanced Trade Tariff Index (BTTI) - a uniform tariff that results in balanced bilateral trade. The BTTI decomposes into a preference-adjusted tariff term and a trade deficit term. Constructing the BTTI requires bilateral product-level import demand elasticities, which we estimate via a translog GDP function with US data, 2010-2023. The elasticities are heterogeneous across products, trade partners, and depending on the direction of trade, with broader implications for quantifying the gains from trade. The resulting BTTIs are significantly smaller than the ‘Liberation Day’ tariffs for most countries, and incurring less deadweight losses.