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)

Abstract: 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)
Date: 2019-02
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Citations: View citations in EconPapers (3)

Published in IDE Discussion Paper = IDE Discussion Paper, No. 741. 2019-02

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https://ir.ide.go.jp/record/50765/files/IDP000741_001.pdf First version, 2019 (application/pdf)

Related works:
Journal Article: Lerner meets Metzler: Tariff pass-through of worldwide trade (2022)
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