Pass-through of trade costs to U.S. import prices

Abstract

This paper measures the pass-through of trade costs into U.S. import prices by using actual data on duties/tari¤s and freight-related costs. The key innovation is to decompose the indirect e¤ects of trade costs (on prices) into the e¤ects 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 e¤ects of trade costs on marginal costs, suggesting that lower trade costs are associated with imports that have higher marginal costs; markups are a¤ected relatively less. When the e¤ects 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 e¤ects of productivity, suggesting that lower trade costs are associated with higher-quality imports that have been produced with lower productivity. JEL Classi…cation F12, F13, F14