The impact of import tariffs on GDP and consumer welfare: A production network approach

Abstract

After decades of trade liberalization, a return to protectionism has been observed in some developed economies. Recent studies have examined the impact of protectionism on international networks. In contrast to these studies, which focus on the impact of import tariffs on the global economy, we develop a production network model with international trade to assess the repercussions of sector-specific import tariffs on the policy-imposing country. Our model shows how the direct impact of higher tariffs on imported intermediate goods is amplified through the domestic production network. We find that the resulting decline in GDP and consumer welfare depends on the affected industries: their network centrality, the elasticity of substitution between foreign and domestic varieties, and the ratio of net-of-tax prices of domestic and foreign varieties. Our work contributes to the current debate on tariff escalation by advancing the literature on the effective rate of protection in a networked economy.

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