When Tariffs Disturb Global Supply Chains

Gene Grossman and Elhanan Helpman

No 15177, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: F12 F13 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (17)

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