Trade Policy and Structural Change

TL;DR

This paper examines how tariffs influence industrial structure and welfare through a dynamic model, revealing that increased tariffs can boost manufacturing share and welfare unless countered by retaliation.

Contribution

It introduces a quantitative dynamic model analyzing the effects of tariffs on structural change and welfare, considering sectoral complementarities and nonhomothetic preferences.

Findings

A 20-percentage-point U.S. manufacturing tariff increase raises manufacturing value-added share by 1%.

Welfare increases by 0.41% with tariff hikes in the absence of retaliation.

Retaliation by trading partners leads to welfare decline.

Abstract

We study how tariffs affect industrial structure and welfare in an economy where sectors are complements and preferences are nonhomothetic -- two drivers of structural change. Import tariffs on a sector influence sectoral composition by affecting its price relative to other sectors and national income, as well as the sector's net exports. We qualitatively characterize these mechanisms and use a quantitative dynamic model to show that a counterfactual 20-percentage-point increase in U.S. manufacturing tariffs would have raised the manufacturing value-added share by one percentage point and increased welfare by 0.41 percent. If trading partners retaliated, welfare would have fallen.