Research / BFI Working PaperJul 05, 2022

Trade Policy and Global Sourcing: An Efficiency Rationale for Tariff Escalation

Pol Antràs, Teresa C. Fort, Agustín Gutiérrez, Felix Tintelnot

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.

More Research From These Scholars

BFI Working Paper Jan 30, 2023

Measuring the Share of Imports in Final Consumption

Emmanuel Dhyne, Ayumu Ken Kikkawa, Magne Mogstad, Felix Tintelnot
Topics:  Industrial Organization
BFI Working Paper Sep 12, 2022

Foreign Demand Shocks to Production Networks: Firm Responses and Worker Impacts

Magne Mogstad, Felix Tintelnot, Emmanuel Dhyne, Ayumu Ken Kikkawa, Toshiaki Komatsu
Topics:  Employment & Wages
BFI Working Paper Feb 27, 2023

Endogenous Production Networks with Fixed Costs

Emmanuel Dhyne, Ken Kikkawa, Xianglong Kong, Magne Mogstad, Felix Tintelnot
Topics:  Uncategorized