Sochbichar

Concept Note Import tariffs have long been used for protecting an economy's domestic industries from external competition. More recently, the emergence of global value chains as an integration platform into the global marketplace has stressed the importance of reducing import tariffs on parts and components that cross international borders several times, before they get assembled into a final good. A stream of literature has emerged on how reducing tariffs on intermediates and raw materials can allow firms to leverage technologies embedded in foreign products as an means of productivity growth. Yet, tariffs on final goods still matter. When countries choose to decrease import tariffs on raw materials and intermediates but keep high tariffs on final goods (a tariff structure known as ‘cascading’), then firms’ profit margins increase, as their costs of production fall, but the price at which they sell their output remains higher than in international markets by virtue of the tariff on the final good. Th