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

Pol Antras, Teresa Fort, Agustín Gutiérrez and Felix Tintelnot

No 30225, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: F1 F12 F13 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-cna and nep-int
Note: IFM ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published as Pol Antràs & Teresa C. Fort & Agustín Gutiérrez & Felix Tintelnot, 2024. "Trade Policy and Global Sourcing: An Efficiency Rationale for Tariff Escalation," Journal of Political Economy Macroeconomics, vol 2(1), pages 1-44.

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