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The Downstream Impact of Upstream Tariffs: Evidence from Investment Decisions in Supply Chains
Published online by Cambridge University Press: 16 June 2023
Abstract
We study how U.S. manufacturing firms’ investment responds to tariff reductions in supplier industries. Our estimates, based on tariff reductions following multinational trade agreements, suggest that a hypothetical 10% reduction of all upstream tariffs would increase downstream investment by 4% to 6%. This estimate is not explained by decreasing uncertainty and stems from tariff reductions for homogeneous and low-R&D inputs, consistent with the investment response resulting from cost reductions rather than superior foreign technology embodied in imported inputs. Evidence from an instrumental variable estimation using the sudden increase in Chinese import penetration suggests that import competition also increases downstream investment.
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- Research Article
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- Creative Commons
- This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
- Copyright
- © The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Footnotes
We thank an anonymous referee, Hyun-Soo Choi, Jean-Edouard Colliard, François Derrien, Olivier Dessaint, Ran Duchin (the editor), Thierry Foucault, Nicola Gennaioli, Basile Grassi, Denis Gromb, Umit Gurun, Johan Hombert, Yun Lou, Andrey Malenko, Jean-Marie Meier, Tomasz Michalski, Julien Sauvagnat, Gill Segal, Rik Sen, Changcheng Song, David Thesmar, Philip Valta, Guillaume Vuillemey, Ryan Williams, Chu Zhang, seminar participants at Cambridge University Judge Business School, Chinese University of Hong Kong, Frankfurt School of Finance and Management, HEC Paris, Hong Kong University of Science and Technology, KAIST, MIT Finance Lunch, Nanyang Technological University, National University of Singapore, Singapore Management University, Tilburg University, University of Hong Kong, and University of Melbourne, as well as participants at the 2016 HEC Paris Workshop on Banking, Finance, Macroeconomics and the Real Economy, European Summer Symposium in Financial Markets 2016 in Gerzensee, CICF 2017, EFMA Annual Meeting 2017, FMA European Conference 2017, Paris December Finance Meeting (AFFI) 2017, WFA Annual Meeting 2018, and SFS Cavalcade North America 2020 for helpful comments and suggestions. Any remaining errors are the responsibility of the authors. We thank the Investissements d’Avenir (ANR-11-IDEX-0003/Labex Ecodec/ANR-11-LABX-0047) and Singapore Ministry of Education Academic Research Fund Tier 1 for supporting our research.
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