The Downstream Impact of Upstream Tariffs: Evidence from Investment Decisions in Supply Chains

67 Pages Posted: 21 Nov 2016 Last revised: 9 Jul 2021

See all articles by Thorsten Martin

Thorsten Martin

Bocconi University; IGIER - Innocenzo Gasparini Institute for Economic Research

Clemens A. Otto

Singapore Management University - Lee Kong Chian School of Business

Date Written: July 9, 2021

Abstract

We study how upstream tariffs affect downstream investment in US manufacturing firms. Exploiting tariff reductions following multinational trade agreements, we estimate that a 10% decrease of upstream tariffs entails an increase in downstream investment by 4% to 6%. This effect stems from tariff reductions for homogeneous and low-R&D inputs (e.g., cement), consistent with the investment response being due to cost reductions rather than superior foreign technology embodied in imported inputs. Extending the analysis beyond tariffs, we use the sudden increase in Chinese import penetration in an instrumental variable estimation and show that higher import competition leads to higher downstream investment.

Keywords: Import Tariffs, Investment, International Supply Chains, Trade in Intermediate Inputs

JEL Classification: F14, F23, G31

Suggested Citation

Martin, Thorsten and Otto, Clemens A., The Downstream Impact of Upstream Tariffs: Evidence from Investment Decisions in Supply Chains (July 9, 2021). Available at SSRN: https://ssrn.com/abstract=2872662 or http://dx.doi.org/10.2139/ssrn.2872662

Thorsten Martin

Bocconi University ( email )

Via Roentgen 1
Milan, 20136
Italy

HOME PAGE: http://https://sites.google.com/view/thorstenmartin

IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Clemens A. Otto (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

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