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When Tariffs Disrupt Global Supply Chains

Author

Listed:
  • Gene M. Grossman

    (Princeton University)

  • Elhanan Helpman

    (Harvard University)

Abstract

We study unanticipated tariffs on imports of intermediate goods in a setting with firm-to-firm supply relationships. Firms that produce differentiated products conduct costly searches for potential input suppliers and negotiate bilateral prices with those that pass a reservation level of match productivity. Global supply chains are formed in anticipation of free trade. Once they are in place, the home government surprises with an input tariff. This can lead to renegotiation with initial suppliers or new search for replacements. We identify circumstances in which renegotiation generates improvement or deterioration in the terms of trade. The welfare implications of a tariff are ambiguous in this second-best setting, but plausible parameter values suggest a welfare loss that rises rapidly at high tariff rates.

Suggested Citation

  • Gene M. Grossman & Elhanan Helpman, 2021. "When Tariffs Disrupt Global Supply Chains," Working Papers 2021-73, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2021-73
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    References listed on IDEAS

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    Cited by:

    1. Elliott, M. & Jackson, M. O., 2024. "Supply Chain Disruptions, the Structure of Production Networks, and the Impact of Globalization," Janeway Institute Working Papers 2415, Faculty of Economics, University of Cambridge.
    2. Peter Eppinger & Gabriel J. Felbermayr & Oliver Krebs & Bohdan Kukharskyy, 2021. "Decoupling Global Value Chains," CESifo Working Paper Series 9079, CESifo.
    3. Emmanouil Karakostas, 2022. "The Effects of Protectionism on the Exports of the Trade Partners: A Composite Index," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 15(1), pages 58-70, July.
    4. Traiberman, Sharon & Rotemberg, Martin, 2023. "Precautionary protectionism," Journal of International Economics, Elsevier, vol. 145(C).

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    More about this item

    Keywords

    global supply chains; global value chains; input tari§s; imported intermediate goods;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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