When Tariffs Disturb Global Supply Chains
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.
We are grateful to Pol Antràs, Harald Fadinger, Chaim Fershtman, Jerry Green, Faruk Gul, Gregor Jarosch, Edi Karni, Robin Lee, Mihai Manea, Emanuel Ornelas, Gianmarco Ottaviano, Steve Redding, Richard Rogerson and Dan Trefler for helpful comments and suggestions and to Chad Bown and Steve Redding for kindly sharing their tariff data. Benjamin Niswonger and Sean Xiang provided superb research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.