Tariff Rate Pass-Through: Buyer Power and Product Differentiation Effects

The recent increase in trade tensions between the US and its primary trading partners has resulted in the imposition of tariffs and retaliatory tariffs. Economic theory would suggest the imposition of tariffs would result in price inflation and lower import volumes. However, there are a variety of other factors, such as product differentiation and imperfect competition that influence tariff rate pass-through levels. This study sheds light on the factors impacting tariff rate pass through by assessing the tariff rate elasticity of imports from 1996 to 2015 in two key manufacturing segments, electrical machinery and passenger vehicles. We find tariff rate pass-through rates are lower in more concentrated domestic product-markets as monopsony power enables buyers to lower the tariff pass-through rate or to push the burden of the tariff onto foreign suppliers. In addition, lower tariff rate pass-through rates prevail in more differentiated domestic product-markets, as quality variations reduce the likelihood that foreign sellers can fully pass along the tariff in terms of higher prices.