DP15177 When Tariffs Disturb Global Supply Chains

Author(s): Gene M. Grossman, Elhanan Helpman
Publication Date: August 2020
Keyword(s): Global supply chains, global value chains, imported intermediate goods, Input tariffs
JEL(s): F12, F13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15177

We study unanticipated tariffs on imports of intermediate goods in a setting with firm-to-firm supply relationships. Firms that produce differentiated products conduct costly searches for potential input suppliers and negotiate bilateral prices with those that pass a reservation level of match productivity. Global supply chains are formed in anticipation of free trade. Once they are in place, the home government surprises with an input tariff. This can lead to renegotiation with initial suppliers or new search for replacements. We identify circumstances in which renegotiation generates improvement or deterioration in the terms of trade. The welfare implications of a tariff are ambiguous in this second-best setting, but plausible parameter values suggest a welfare loss that rises rapidly at high tariff rates.