Firm export responses to tariff hikes

Abstract

We study how firms react to unexpected increases in import tariffs. We identify our results from a sudden removal of American preferential tariffs applied on Argentine imports under the Generalized System of Preferences, which reflected American retaliation to a dispute over intellectual property between the two countries. Critical for identification, the tariff hike affected a third of Argentine exports enjoying preferential access in the American market, but did nothing to the other two thirds. We find that the higher tariffs reduced export participation of affected Argentinian firms in the US market, whereas resilient exporters dealt with the cost increase by reshuffling their export baskets away from the products whose tariffs increased. In fact, affected firms were more likely both to drop suspended products from their export basket and to start exporting new (non-suspended) products to the US. Remarkably, the extensive margin effects carry over to third markets, where policy did not change: after the policy shock, affected firms selling to the US were less likely to export to other markets. This happened only for firms that also exited the American market. We develop a simple framework to rationalize the observed export interdependencies: while the extensive margin and third-country effects require country and product specific fixed costs, the effect on the sub-extensive and sub intensive (firm-product) margins require diseconomies of scope, where exporting a product increases the marginal cost of exporting other products in the export mix.

Non Technical Summary

This paper studies how exporting firms react when the tariffs they face in a major foreign market suddenly increase. This question is highly relevant for policy today, as governments increasingly use tariffs, trade preferences, and retaliatory trade measures as instruments of economic and political strategy. Yet we still have limited evidence on how firms actually adjust when access to an important market becomes more costly.

The paper provides such evidence by examining a clear policy shock: the United States’ 1997 suspension of preferential tariff treatment for a group of Argentine products under the Generalized System of Preferences. The suspension was linked to a dispute between the United States and Argentina over intellectual property protection. As a result, some Argentine products that had previously entered the US market duty-free suddenly faced positive tariffs. Importantly, the policy affected only a subset of products, while other Argentine exports to the United States were not directly affected.

This makes it possible to compare affected and unaffected firms and products, and to identify how exporters respond to tariff increases.

The first finding is that higher tariffs reduce export participation in the affected market. Some firms exposed to the tariff increase stopped exporting to the United States altogether. This shows that even relatively targeted tariff changes can affect the extensive margin of trade: not only how much firms export, but whether they export at all. For policymakers, this matters because firm exit from export markets can have lasting consequences if rebuilding foreign relationships is costly.

The second finding is that firms that remained active in the US market adjusted by changing what they exported. Rather than simply reducing total exports, resilient exporters reshuffled their product baskets away from products whose tariffs increased and toward products that were not affected by the suspension. Affected firms became more likely to drop suspended products and more likely to introduce new non-suspended products in the US market. This suggests that multiproduct exporters have some flexibility to respond to trade-policy shocks, but that this flexibility operates through changes in product composition.

The third finding is particularly important: the effects of the tariff increase were not confined to the US market. Firms affected by the US tariff shock also became less likely to export to other foreign markets, even though trade policy in those markets did not change. This third-market effect was concentrated among firms that exited the US market. The result shows that export decisions across markets are interconnected. A tariff increase in one major destination can therefore spill over to firms’ global export strategies.

The paper explains these patterns through a framework in which firms face fixed costs of exporting and interdependencies across products and destinations. When a tariff increase makes one product less profitable in one market, the firm may adjust its entire export strategy. Some firms may exit the affected market because remaining active no longer covers the relevant fixed costs. Others may reallocate effort and sales across products. In some cases, losing a major destination may also make it less profitable to keep exporting to other markets.

These findings have direct policy implications. Evaluating tariffs by only looking at affected products in the targeted market misses part of the story. Tariff increases can reshape firms’ export baskets, reduce firm participation, and generate spillovers to markets where tariffs have not changed. For governments considering tariff hikes, preference withdrawals, or retaliatory measures, the paper highlights the need to account for firm-level adjustment and market interdependencies. For countries whose firms face tariff increases abroad, the results underline the importance of policies that help exporters adapt, diversify products, and maintain access to alternative markets.