Working Paper: NBER ID: w27722
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: tariffs; global supply chains; welfare implications
JEL Codes: F1; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tariff implementation (F13) | input prices (E30) |
| tariff implementation (F13) | sourcing decisions (M11) |
| sourcing decisions (M11) | input prices (E30) |
| tariff implementation (F13) | welfare loss (D69) |
| tariff implementation (F13) | terms of trade (F14) |
| terms of trade (F14) | welfare loss (D69) |