Fact of the Week: A 10 Percent Reduction in Tariffs on Intermediate Goods Increases Productivity Growth by 1.9 Percent, an Impact 6.5 Times Greater Than the Same Reduction on Final Goods

Source: Sugata Marjit, Anwesha Basu and C. Veeramani, “Growth Gains from Trade,” October 2019, CESifo Working Paper No. 7905.

Commentary: Prior to last week’s progress toward an interim trade deal with China, the United States had repeatedly delayed the expansion of tariffs on Chinese goods to most finished products. This was out of concern that such an escalation would hit U.S. consumers harder than existing tariffs on the intermediate goods that serve as inputs for companies to make their final products. But new research contradicts this assumption, suggesting that tariffs on intermediate goods are significantly more harmful to economic growth than tariffs on final goods. Examining the flow of goods between 21 countries and 30 industries over 15 years, the study finds that reducing tariffs on intermediate goods by 10 percent increases the growth rate of productivity by 1.9 percent and output by 1.3 percent. In contrast, the same reduction on tariffs for final goods is estimated to increase productivity growth by only 0.3 percent and output growth by only 0.1 percent.