International Finance Discussion Papers (IFDP)
April 2024
Tariff Rate Uncertainty and the Structure of Supply Chains
Sebastian Heise, Justin R. Pierce, Georg Schaur, and Peter K. Schott
Abstract:
We show that reducing the probability of a trade war promotes long-term importer-exporter relationships that ensure provision of high-quality inputs via incentive premia. Empirically, we introduce a method for distinguishing between these long-term relationships--which the literature has termed "Japanese" due to their introduction by Japanese firms--from spot-market relationships in customs data. We show that the use of "Japanese" relationships varies intuitively across trading partners and products and find that the use of such relationships increases after a reduction in the possibility of a trade war. Extending the standard general equilibrium trade model to encompass potential trade wars and relational contracts, we estimate that eliminating "Japanese" procurement reduces welfare about a third as much as moving to autarky.
Keywords: Supply chain, Uncertainty, Trade war, Procurement
DOI: https://doi.org/10.17016/IFDP.2024.1389
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