The negative effects of trade protection along supply chains

With the rise of China as an exporting powerhouse, many developed countries suffered losses in manufacturing employment. To support some of these industries, governments had to rely on trade barriers. We have seen this most recently when former US President Donald Trump imposed tariffs on goods imported from China, who in turn retaliated with its own tariffs, culminating in the US-China trade war.

This led many researchers to examine the effects of trade protection, not only on the protected industries but also on vertically linked industries. In fact, in a world with highly integrated cross-border supply chains, tariffs on key inputs can have detrimental effects on downstream industries.

One of the challenges of estimating the effect of trade protection on industry-level factors such as employment is the endogeneity of trade policy. For example, industries that face negative productivity shocks would be more likely to ask their governments for trade protection. Estimations that do not take this type of unobservable factor into account would produce coefficients that are biased. In our paper, we tackle endogeneity by using an instrumental variables strategy to estimate the causal effect of trade protection along supply chains.

We focus on US antidumping (AD) duties – its most frequently used trade barrier – on imports from China during 1988-2016. We instrument these duties by combining exogenous variation in the political importance of industries and their historical experience in AD proceedings. We find that commissioners at the US International Trade Commission (ITC), one of the institutions in charge of AD investigations, are more likely to vote for duties to protect industries that are important in “swing” states, especially if these industries have previous knowledge of the complex AD procedures.

In the second part of the paper, we use our instrumental variables strategy and find that trade protection has resulted in net job losses by slowing employment growth in downstream industries. We further provide evidence that AD duties have increased costs for downstream producers by limiting imports and raising prices. Overall, the paper’s findings show that instead of sheltering jobs, trade protection can cause additional job losses, indicating that trade policy should take vertical linkages into account.