Clemes Otto, Assistant Professor of Finance and BNP Paribas Fellow at Singapore Management University Lee Kong Chian School of Business
We study the impact of upstream tariffs on downstream investment in US manufacturing firms. Exploiting tariff reductions following multinational trade agreements (GSP, GATT, NAFTA) in a difference-in-differences framework, we estimate that a 10 per cent decrease of upstream tariffs entails an increase in downstream investment by four per cent to six per cent. We also find that lower upstream tariffs are followed by higher downstream output, employment, and total factor productivity. Extending the analysis beyond import tariffs, we use the sudden increase in Chinese import penetration in an instrumental variable estimation and show that higher import competition upstream leads to higher investment downstream.