How exporters neutralized an increase in tariffs

TL;DR

This paper examines how Spanish exporters mitigated the impact of US tariffs on EU products by substituting with unaffected countries and varieties, demonstrating tariff avoidance as a key strategy.

Contribution

It provides empirical evidence that exporters can neutralize tariff increases through substitution and variety shifting, highlighting a new margin for trade policy impact analysis.

Findings

Export revenue did not significantly decline despite tariffs.

Exporters substituted Spanish products with unaffected country products.

Tariff avoidance through substitution is an effective response.

Abstract

I use the unanticipated and large additional tariffs the US imposed on European Union products due to the Airbus-Boeing conflict to analyze how exporters reacted to a change in trade policy. Using firm-level data for Spain and applying a difference-in-differences methodology, I show that the export revenue in the US of the firms affected by the tariff hike did not significantly decrease relative to the one of other Spanish exporters to the US. I show that Spanish exporters were able to neutralize the increase in tariffs by substituting Spanish products with products originated in countries unaffected by tariffs and shifting to varieties not affected by tariffs. My results show that tariff avoidance is another margin exporters can use to counteract the effects of a tariff hike.