Import tariff transmission in a production network

We find evidence that US manufacturing sectors experience US import tariffs either as supply-side or demand-side shocks, depending on the location of the sector and the affected products in the US production network. Using local projections in a panel of US manufacturing sectors, we find that US import tariffs – in particular including the 2018-19 tariff hikes – led to sectoral output contractions via two different channels: (1) Tariff increases act as negative supply shocks for sectors that use the affected goods as input in production and thus face rising input costs. (2) Tariff increases act as negative demand shocks for sectors whose customers experience the tariff increase as a negative supply shock and reduce their production. Though the aim of tariffs often is to protect local industries, we find only limited evidence of such a protective effect. 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.