Trade Policy and Global Sourcing: An Efficiency Rationale for Tariff Escalation / Pol Antràs, Teresa C. Fort, Agustín Gutiérrez, Felix Tintelnot.

Format:

Book

Author/Creator:

Antràs, Pol.

Contributor:

National Bureau of Economic Research.

Fort, Teresa C.

Gutiérrez, Agustín.

Tintelnot, Felix.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30225.

NBER working paper series no. w30225

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

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 - predict that welfare-maximizing tariffs are uniform across sectors. We show that tariff escalation can be rationalized on efficiency grounds in the presence of scale economies. When both downstream and upstream sectors produce under increasing returns to scale, a unilateral tariff in either sector boosts the size and productivity of that sector, raising welfare. While these forces are reinforced up the chain for final-good tariffs, input tariffs may drive final-good producers to relocate abroad, mitigating their potential productivity benefits. The welfare benefits of final-good tariffs thus tend to be larger, with the optimal degree of tariff escalation increasing in the extent of downstream returns to scale. A quantitative evaluation of the US-China trade war demonstrates that any welfare gains from the increase in US tariffs are overwhelmingly driven by final-good tariffs.

Notes:

Print version record

July 2022.