Tariffs across the supply chain

What are the macroeconomic impacts of tariffs on final goods versus intermediate inputs? We set up a two-region, multi-sector model with global production networks, sticky prices and wages, and trade in consumption, investment, and intermediate goods. We show, analytically and quantitatively, that import tariffs on final goods have a smaller negative impact on GDP compared to tariffs on intermediate inputs, as final goods can be more readily substituted domestically. By contrast, tariffs on intermediate inputs lead to larger GDP losses, given the limited substitutability of foreign inputs. Moreover, inflation persistence is lower under tariffs on final goods, whereas tariffs on intermediate goods give rise to persistent cost pressures through production linkages. The results imply that revenue-equivalent import tariffs targeting only final goods can cushion the adverse effects of trade fragmentation.