Title

When Tariffs Disrupt Global Supply Chains

Author(s)

Gene M. Grossman Gene Grossman (Princeton University)

Elhanan Helpman Elhanan Helpman (Harvard University)

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.

Creation Date

2021-01

Section URL ID

Paper Number

2021-73

URL

https://www.princeton.edu/~grossman/When_Tariffs_Disrupt_Global_Supply_Chains.pdf

File Function

Jel

F13, F12

Keyword(s)

global supply chains, global value chains, input tari§s, imported intermediate goods

Suppress

false

Series

13