The Downstream Impact of Upstream Tariffs: Evidence from Investment Decisions in Supply Chains
67 Pages Posted: 21 Nov 2016 Last revised: 9 Jul 2021
Date Written: July 9, 2021
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
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