When Tariffs Disturb Global Supply Chains

70 Pages Posted: 25 Aug 2020 Last revised: 1 Apr 2023

See all articles by Gene M. Grossman

Gene M. Grossman

Princeton University - Princeton School of Public and International Affairs; Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Elhanan Helpman

Harvard University

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Date Written: August 2020

Abstract

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.

Suggested Citation

Grossman, Gene M. and Helpman, Elhanan, When Tariffs Disturb Global Supply Chains (August 2020). NBER Working Paper No. w27722, Available at SSRN: https://ssrn.com/abstract=3679715

Gene M. Grossman (Contact Author)

Princeton University - Princeton School of Public and International Affairs ( email )

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Elhanan Helpman

Harvard University ( email )

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