Hysteresis in the U.S. Tariff Code: Origins and Implications

Citation:

Lydia Cox and Miguel Acosta. In Preparation. “Hysteresis in the U.S. Tariff Code: Origins and Implications”.

Abstract:

There is substantial variation in U.S. tariff rates across varieties within narrowly defined products (goods). For example, tariff rates on handbags range from 5 to 16 percent, depending on their material. In this paper, we document the presence, historical origins, and consequences of this pattern. Using a newly constructed dataset on legislated tariffs that covers all major trade agreements back to the 1930 Smoot-Hawley Act, we show that this within-good variation in tariffs originated in trade agreements made in the 1930s and 40s and has persisted over time. Early trade agreements were made primarily with other high-income nations, and concessions were made on the specific varieties of goods that those countries produced. Instead, later GATT and WTO tariff negotiations had the broader focus of bringing down the average level of tariffs. One important consequence of this hysteresis in trade policy is that, today, tariffs are systematically higher on cheaper varieties of goods relative to their more expensive counterparts. We show that failing to take this heterogeneity into account substantially alters the distributional consequences of trade policy.