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.
We develop a multi-country model in which multinational firms choose not only the location of their various assembly plants worldwide, but also the countries from which these plants import inputs. Our framework identifies a natural complementarity between these global sourcing and global assembly decisions. This complementarity delivers novel implications for the role of geography and trade policy in shaping the firms' global production strategies. By merging data on the full range of all US firms' domestic activities and imports from the US Census Bureau with comprehensive information on US multinationals' foreign affiliate activity and on foreign-owned firms' US plants, we provide novel evidence on these interdependencies. Multinationals account for the vast majority of US imports and exports, their export platform sales dwarf US exports, and they are much more likely to import not only from the countries in which they have affiliates, but also from other countries within their affiliate's region.
We propose a theory of the relationship between globalization and pandemics. We start by documenting the importance of international trade for the diffusion of infections in several pandemics throughout history. We also show that trade is closely intertwined with travel. Motivated by this evidence, we build a framework in which business travel facilitates trade according to a constant elasticity gravity equation mediated by mobility frictions. In turn, travel leads to human interactions that transmit disease, as in the Susceptible-Infected-Recovered (SIR) model. We highlight three novel interactions between these two mechanisms. First, trade-motivated travel generates an epidemiological externality across countries. Therefore, reductions in international frictions affect the evolution of the epidemic in each country, and the condition for a pandemic to occur. Second, if infections lead to deaths, or reduce individual labor supply, we establish a general equilibrium social distancing effect, whereby increases in relative prices in unhealthy countries reduce travel to those countries. Third, if agents internalize the threat of infection, we show that their behavioral responses lead to a reduction in travel that is larger for higher-trade-cost locations, and hence leads to an initial fall in the ratio of trade to GDP in the early stages of the epidemic, before a subsequent recovery.
This paper characterizes the transitional dynamics of the savings rate in the neoclassical growth model. I start with a general formulation with weak assumptions on preferences and technology and go on to fully describe the transitional behavior of the savings rate under particular functional forms. It is shown that under plausible functional forms for preferences and technology, the model is able to explain the hump-shaped behavior of the savings rate observed in most OECD countries in the period 1950-1990. The paper also provides econometric evidence supporting the empirical relevance of the neoclassical growth model in explaining the dynamics of the savings rate both in OECD countries and in a larger cross-section of countries.