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

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

Journal of Political Economy Macroeconomics, 2024, vol. 2, issue 1, 1 - 44

Abstract: Import tariffs tend to be higher on final goods than inputs, a phenomenon referred to as tariff escalation. Despite its salience, existing research does not predict that tariff escalation increases welfare. We show that tariff escalation is usually welfare-improving when final-good production occurs under increasing returns to scale. In our vertical model, countries export inputs directly or by embodying them in final goods. The latter raises welfare if final-good efficiency is increasing in sector size, and a disproportionately high final-good tariff exploits this benefit. When tariffs are the only available instruments, this effect dominates input-tariff motives for most parameter values.

Date: 2024
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