Tariffs and growth: Heterogeneity by economic structure

Abstract

This paper provides novel empirical evidence that the medium-term relationship between trade liberalization and growth varies substantially with countries’ economic structure. Using a multi-method strategy, I examine per capita income dynamics after tariff reductions in a panel of 161 countries from 1960 to 2019. Baseline local projections reveal a sharp divergence: GDP per capita rises in manufacturer countries following tariff reductions, and notably falls in nonmanufacturers. A local projections difference-in-differences framework strengthens the analysis by accounting for treatment effect heterogeneity and variation in treatment timing. Finally, I study tariff reductions during the WTO-era reform period (1986 to 1994), a policy episode that historical evidence supports as plausibly exogenous, providing complementary evidence that confirms the observed heterogeneity. An exploration of mechanisms using local projections links these patterns to shifts in productivity, capital stocks, and manufacturing shares in GDP, consistent with theoretical expectations. The findings suggest that rising protectionism in manufacturer countries may be harmful, while further liberalization in nonmanufacturers could have unintended consequences.