%0 Journal Article %J forthcoming, Journal of Political Economy Macroeconomics %D Forthcoming %T Trade Policy and Global Sourcing: A Rationale for Tariff Escalation %A Pol Antras %A Teresa Fort %A Agustín Gutiérrez %A Felix Tintelnot %X

 

Import tariffs tend to be higher on final goods than inputs, a phenomenon commonly referred to as tariff escalation. Despite its salience, existing trade policy results do not predict that tariff escalation increases social welfare. We show that tariff escalation is often welfare-improving when final-good production occurs under increasing returns to scale. In our model, a country can export inputs directly, or by embodying them into exports of final goods. The latter raises welfare when final-good efficiency is increasing in sector size, and a final-good production subsidy or import tariff are equally effective in exploiting this benefit. When import tariffs are the only policy tools, this force generally dominates other motives for an input tariff, leading to a disproportionately large tariff on final goods. We calibrate our model and show that in such second-best settings, tariff escalation maximizes welfare for empirically relevant parameter values whenever the returns to scale for final goods are at least as large those for inputs. A quantitative evaluation of the US-China trade war demonstrates that any welfare gains are overwhelmingly driven by final-good tariffs.

 

%B forthcoming, Journal of Political Economy Macroeconomics %G eng