Working Paper: CEPR ID: DP15177
Authors: Gene M. Grossman; Elhanan Helpman
Abstract: We study unanticipated tariffs on imports of intermediate goods in a setting with firm-to-firm supply relationships. Firms that produce differentiated products conduct costly searches for potential input suppliers and negotiate bilateral prices with those that pass a reservation level of match productivity. Global supply chains are formed in anticipation of free trade. Once they are in place, the home government surprises with an input tariff. This can lead to renegotiation with initial suppliers or new search for replacements. We identify circumstances in which renegotiation generates improvement or deterioration in the terms of trade. The welfare implications of a tariff are ambiguous in this second-best setting, but plausible parameter values suggest a welfare loss that rises rapidly at high tariff rates.
Keywords: Global Supply Chains; Global Value Chains; Input Tariffs; Imported Intermediate Goods
JEL Codes: F12; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unanticipated tariffs on intermediate goods (F69) | Supply chain renegotiation (L14) |
| Unanticipated tariffs on intermediate goods (F69) | Pricing (D49) |
| Unanticipated tariffs on intermediate goods (F69) | Welfare (I38) |
| Input tariffs (F14) | Renegotiation of existing supply contracts (L14) |
| Renegotiation of existing supply contracts (L14) | Terms of trade (F14) |
| Elastic demand (D12) | Input prices rise more than the tariff rate (E31) |
| Inelastic demand (D12) | New entrants may emerge (L26) |
| Higher tariff rates (F14) | Welfare losses (D69) |
| Tariffs (F19) | Bargaining power dynamics shift (D74) |
| Bargaining power dynamics shift (D74) | Negotiated prices (P22) |
| Bargaining power dynamics shift (D74) | Overall welfare outcome (I31) |