Welfare gains from tariffs
This paper by Antràs et al. takes a more granular look at the impact of tariffs on employment and welfare by differentiating between tariffs imposed on inputs and tariffs imposed on final goods. They analyze the market structures under which tariff escalation emerges as a social-welfare maximizing policy. They use a general-equilibrium framework with an upstream and downstream sector which produce differentiated intermediate and final goods, respectively, both under increasing returns to scale. The assumption of increasing returns to scale is important since neoclassical models with constant returns to scale do not predict that lower input tariffs are optimal. The model is one of a small open economy with a home and foreign country and trade in both inputs and final goods. They find:
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.
Trade Policy and Global Sourcing: An Efficiency Rationale for Tariff Escalation
Authors: Pol Antràs, Agustín Gutiérrez, Teresa C. Fort, Felix Tintelnot
From: Harvard University, Tuck School at Dartmouth, University of Chicago
