Tariff Rate Uncertainty and the Structure of Supply Chains

RePEc Short ID: ppi197
ORCID iD: 0000-0003-2744-5918

Heise, Sebastian; Pierce, Justin R.; Schaur, Georg; Schott, Peter K.

doi:10.17016/IFDP.2024.1389

Working Paper

Tariff Rate Uncertainty and the Structure of Supply Chains

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;

JEL Classification: F13; F14; F15; F23;

https://doi.org/10.17016/IFDP.2024.1389