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Tariffs across the supply chain

Author

Listed:
  • Gnocato, Nicolò
  • Montes-Galdón, Carlos
  • Stamato, Giovanni

Abstract

What are the macroeconomic impacts of tariffs on final goods versus intermediate inputs? We set up a two-region, multi-sector model with production networks, sticky prices and wages, and trade in consumption, investment, and intermediate goods. We show that import tariffs on final goods have a smaller negative impact on GDP compared to tariffs on intermediate inputs, as final goods can be more readily substituted with domestic alternatives. In contrast, tariffs on intermediate inputs lead to larger GDP losses, given the limited substitutability of foreign inputs and their role in global supply chains. Moreover, inflation persistence is lower under tariffs on final goods, whereas tariffs on intermediate goods amplify cost pressures through production linkages. The results imply that a revenue-equivalent approach to import tariffs, targeting only final goods, can cushion the adverse effects of trade wars. JEL Classification: E31, E32, F12, F13, F41

Suggested Citation

  • Gnocato, Nicolò & Montes-Galdón, Carlos & Stamato, Giovanni, 2025. "Tariffs across the supply chain," Working Paper Series 3081, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253081
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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