Import tariffs contract US manufacturing via network linkages
A European Central Bank working paper shows that US import tariffs reduce domestic manufacturing output through backward and forward network linkages. The study analyzes a panel of 71 US manufacturing industries from 2004 to 2020.
Backward costs and forward drops
The study identifies two distinct channels through which import tariffs transmit across the US production network.
The backward exposure channel acts as a negative supply shifter, where tariffs on imported intermediate goods raise input costs, increasing producer prices and reducing output.
Conversely, the forward exposure channel operates as a negative demand shifter.
When downstream customer sectors face higher costs and contract production, their upstream suppliers experience a decline in demand, leading to lower output and reduced prices across connected industries.
Disproving the protection myth
Analyzing data from 71 US manufacturing industries between January 2004 and January 2020, the authors find that tariff hikes markedly reduce production without providing the intended protection for local industries.
While intra-sector linkages are strong, the negative macroeconomic impact is primarily driven by inter-sector transmission.
These empirical findings align with modern theoretical models emphasizing production network complementarities and demand chain amplification effects.
The illusion of trade protection
This paper delivers a sharp empirical reality check on protectionist trade policies.
By mapping complex input-output linkages, the authors demonstrate that tariffs systematically backfire through supply chain contagion.
Policymakers ignoring these network-driven output contractions do so at their own peril.