Lerner meets metzler: tariff pass-through of worldwide trade
Kazunobu Hayakawa ()
No 741, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)
In this paper, we start with quantifying the worldwide tariff pass-through, i.e., the impact of tariff reductions on trade prices. We find that a 1% reduction of tariffs decreases trade prices by 0.1%, i.e., a negative tariff pass-through (Lerner paradox). To uncover the mechanism underlying this result, we decompose trade prices into product quality and quality-adjusted trade prices. As a result, we found that a 1% reduction of tariff rates decreases product quality by 1.2% and increases quality-adjusted trade prices by 1.1% (Metzler paradox). We construct a theoretical model that demonstrates the mechanism behind these empirical results. We suggest that both a firm-delocation mechanism under variable markups and a quality-sorting mechanism are the driving forces behind these empirical findings. Lastly, by employing this theoretical model, we also examine the welfare effect of tariff changes.
Keywords: Tariff pass-through; Import prices; Quality (search for similar items in EconPapers)
JEL-codes: F15 F53 (search for similar items in EconPapers)
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Published in IDE Discussion Paper = IDE Discussion Paper, No. 741. 2019-02
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