Pass-through of trade costs to U.S. import prices
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This paper measures the pass-through of trade costs into U.S. import prices by using actual data on duties/tariffs and freight-related costs. The key innovation is to decompose the indirect effects of trade costs (on prices) into the effects on markups, quality and productivity while measuring/interpreting the pass-through of trade costs into welfare. Robust to the consideration of variable versus constant markups, there is evidence for incomplete pass-through, mostly due to the negative indirect effects of trade costs on marginal costs, suggesting that lower trade costs are associated with imports that have higher marginal costs; markups are affected relatively less. When the effects of trade costs on marginal costs are further decomposed into their components, the positive contribution of quality dominates in all cases, followed by the negative effects of productivity, suggesting that lower trade costs are associated with higher-quality imports that have been produced with lower productivity.
KeywordsPass-through Trade costs Variable markups Quality Productivity
JEL ClassificationF12 F13 F14
The author would like to thank Harmen Lehment, Sylvia Kuenne, an anonymous referee, Robert C. Feenstra, and the participants of 2013 International Trade Workshop at Florida International University for their helpful comments and suggestions.
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