The effects of tariff hikes in a world of global value chains

The expansion of global value chains (GVCs) over the past decades has influenced how trade tariffs affect economic activity. Global sourcing activities of firms imply that a tariff, usually imposed to protect a domestic industry, can entail higher input costs for other industries. The empirical evidence presented here corroborates this point: tariffs that raise input costs are found to negatively affect the output of industries relying on foreign sourcing. The analysis further suggests that the sensitivity of trade to tariffs is higher for production stages further downstream in global supply chains. In the context of the current trade dispute between the United States and China, this evidence may be of relevance, since the US tariffs against China affected a large number of intermediate goods and Chinese exports to the United States – in part – relate to downstream production stages of GVCs. JEL Classification: F14, F15, E23