The Downstream Impact of Upstream Tariffs: Evidence from Investment Decisions in Supply Chains

2023/06/16 by Thorsten Martin, Clemens A. Otto · 1 citation
Economics, Econometrics and Finance · #Global trade and economics #Climate Change Policy and Economics #Fiscal Policy and Economic Growth

paper · pdf · doi:10.1017/s0022109023000777

Abstract

Abstract We study how U.S. manufacturing firms’ investment responds to tariff reductions in supplier industries. Our estimates, based on tariff reductions following multinational trade agreements, suggest that a hypothetical 10% reduction of all upstream tariffs would increase downstream investment by 4% to 6%. This estimate is not explained by decreasing uncertainty and stems from tariff reductions for homogeneous and low-R&D inputs, consistent with the investment response resulting from cost reductions rather than superior foreign technology embodied in imported inputs. Evidence from an instrumental variable estimation using the sudden increase in Chinese import penetration suggests that import competition also increases downstream investment.

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