What tariffs tell us about the world trading system
Adão et al. analyze the efficiency and distributional properties of the global trading system by estimating the implicit weights that countries place on each other’s welfare when setting trade policies. The authors develop a quantitative model of the world economy with nested CES production and utility functions and calibrate the model to 2001 data on global trade flows, input-output linkages, and tariffs for 28 countries/regions and over 5,000 products. They then estimate the “opportunistic tariffs” that countries would set if acting purely in self-interest and compare them to observed tariffs to estimate welfare weights countries implicitly place on each other.
Key findings:
- Countries internalize the impact of their trade policies on others to a significant extent, but not fully. On average, they value $1 transferred to another country 19% less than $1 to their own residents.
- There is substantial reciprocity – countries that place higher weight on others’ welfare tend to receive higher weights in return. This holds both within and outside the WTO.
- The world trading system is not Pareto efficient, as countries disagree on relative welfare weights and miss opportunities to more efficiently redistribute income.
- Reciprocity in welfare weights is much stronger than in raw tariff data, suggesting it reflects broader forces than just formal trade agreements.
- The median country gains about 5.2% in welfare from reciprocity compared to acting opportunistically.
- Average welfare weights have increased over time from 1997-2019, indicating growing cooperation.
The paper concludes that the global trading system exhibits significant cooperation sustained by reciprocity, beyond what can be explained by formal trade institutions alone. However, there remain opportunities for Pareto improvements in global trade policy.
A World Trading System For Whom? Evidence from Global Tariffs
Authors: Rodrigo Adão, John Sturm Becko, Arnaud Costinot, Dave Donaldson
From: University of Chicago-Booth, Princeton University, MIT
Can tariff escalation be welfare-improving?
Antràs et al. provide an interesting take on the conditions under which tariff escalation could actually be welfare improving. The authors develop a two-sector model with final goods and intermediate inputs both produced under increasing returns to scale to analyze optimal trade policies. They are considering both first-best policies (with production subsidies and export taxes available) and second-best policies (with only import tariffs available) and conduct quantitative analysis for a large open economy calibrated to US data. In particular, they use the calibrated model to evaluate the welfare effects of tariff changes during the 2018-2019 US-China trade war.
Key findings:
- In the first-best setting, optimal policies feature tariff escalation (higher tariffs on final goods than inputs) driven by increasing returns to scale in downstream production.
- In the second-best setting with only import tariffs, tariff escalation remains optimal for a wide range of empirically relevant parameter values.
- Tariff escalation is more likely to be optimal when:
– Downstream returns to scale are larger relative to upstream returns
– The downstream labor share is lower
– Final good demand is more elastic relative to input demand
- Quantitative analysis shows:
– Optimal second-best tariffs for the US feature escalation (30% on final goods vs 20% on inputs)
– Welfare gains from unilateral US tariff increases in 2018-2019 were small and driven overwhelmingly by final good tariffs rather than input tariffs
- The efficiency rationale for tariff escalation stems from the fact that cheaper inputs expand downstream production and raise its efficiency, while input tariffs distort input choices for firms that can relocate.
In summary, the paper provides a novel economic rationale for the widely observed phenomenon of tariff escalation based on increasing returns to scale in downstream production. This contrasts with previous literature that did not find welfare-maximizing justifications for escalated 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, University of Wisconsin-Madison, Tuck School at Dartmouth, University of Chicago
