Import tariff transmission in a production network

We find that whether US import tariffs have supply-side effects or demand-side effects on US manufacturing sectors depends on where the affected sectors are located in the US production network. Using local projections in a panel of US manufacturing sectors, we find that US import tariffs —including the 2018-19 tariff hikes— led to sectoral output contractions via two different channels: (1) Tariff increases act as negative supply shifters for sectors that use goods from tariff-facing sectors as input in production and thus face rising input costs. (2) Tariff increases act as negative demand shifters for sectors whose customer sectors suffer negative supply side effects due to tariffs and reduce their production. We show that these results are consistent with a stylized production network model featuring complementarities in production. Overall, our finding suggests that tariffs markedly reduce US manufacturing production and that the role of input–output linkages is key for understanding the transmission of import tariff shocks to output and producer prices. JEL Classification: E23, E32, F13