Trade Policy and Global Sourcing: A Rationale for Tariff Escalation

Citation:

Antras, Pol, Teresa Fort, Agustín Gutiérrez, and Felix Tintelnot. Working Paper. “Trade Policy and Global Sourcing: A Rationale for Tariff Escalation”.
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Abstract:

We study trade policy in an environment with intermediate and final good trade. Real-world import tariffs tend to be higher for final goods than for inputs, a phenomenon commonly referred to as tariff escalation. Yet, neoclassical trade theory – and modern Ricardian trade models, in particular – cannot easily rationalize this fact. We show that tariff escalation can be rationalized on efficiency grounds in the presence of scale economies. A unilateral tariff in either sector increases a country’s relative wage and boosts the size and productivity of each sector, both of which raise welfare. While these forces are reinforced up the chain for final-good tariffs, input tariffs raise final-good producers’ costs, mitigating their potential benefits.  A quantitative evaluation of the US-China trade war demonstrates that any welfare gains from the increase in US tariffs are overwhelming driven by final-good tariffs.

Last updated on 01/07/2022