The downstream impact of upstream tariffs: Evidence from investment decisions in supply chains

Author

Thorsten MARTIN, Bocconi University
Clemens A. OTTO, Singapore Management UniversityFollow

Publication Type

Journal Article

Version

publishedVersion

Publication Date

9-2024

Abstract

We study how US 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.

Keywords

Import Tariffs, Investment, International Supply Chains, Trade in Intermediate Inputs

Discipline

Finance and Financial Management | Operations and Supply Chain Management

Research Areas

Finance

Publication

Journal of Financial and Quantitative Analysis

Volume

59

Issue

6

First Page

2695

Last Page

2732

ISSN

0022-1090

Identifier

10.1017/S0022109023000777

Publisher

Cambridge University Press

Citation

MARTIN, Thorsten and OTTO, Clemens A.. The downstream impact of upstream tariffs: Evidence from investment decisions in supply chains. (2024). Journal of Financial and Quantitative Analysis. 59, (6), 2695-2732.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7265

Copyright Owner and License

Authors

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Additional URL

https://doi.org/10.1017/S0022109023000777