Trade Policy as an Exogenous Shock: Focusing on the Specifics

Abstract

Per-unit trade costs feature prominently in international trade. Such costs differ from ad valorem trade costs in that, as price levels change, they generate quasi-random variation in protection within endogenously determined trade policy regimes. Using a newly digitized database encompassing the universe of tariff lines across five US trade policy regimes between 1900 and 1940, we document the extent of intra-policy variation created by the presence of per-unit, or specific tariffs. We show that price dynamics combine with industry reliance on specific tariffs to generate large swings in average industry tariff levels -- up to 6.5 percentage points over five-year intervals. We leverage this variation to estimate the effect of changes in tariff protection on import growth and the subsequent effect of imports on local labor markets. At the industry level, we show that relative changes in protection are strongly predictive of import growth, while across labor markets we find that import growth reduces labor force attachment. It also affects the distribution of employment across industries, reducing growth in manufacturing employment but increasing it in agriculture and services. The effects of rising imports fall most heavily on the young.

Keywords: International Trade, Economic History, Trade Policy, Inflation, Labor Markets

JEL Classification: F1, F6, N1, N7, J2