Import subsidies could boost welfare by correcting input distortion in trade.
The article discusses how monopolistic competition and input-output linkages can lead to a distortion in production, favoring labor over intermediate inputs. This distortion can be corrected through import subsidies, leading to positive welfare effects. By comparing different economic scenarios, the researchers identify optimal policies to address this distortion, including cooperative subsidies for intermediate input use. Tariffs can also be used to balance trade effects with correcting the input distortion.