Falling tariffs: implications of globalization induced tariff reductions on firms, workers, and tax revenues

Rising globalization has exerted a downward pressure on global tariffs, thereby eroding tariff revenues in developing nations. We analyse how gains from lowering import tariffs are distributed within the firm and the corresponding tax (base) implications. First, we study the effect of tariff changes on imports. Second, we estimate the firm-level semi-elasticities of profits, sales, capital, and wages with respect to import tariffs. Using linked employer-employee data and firm-product-level import data for South Africa, we find that lowering tariffs leads to higher imports and lower import prices, raises within-firm wage inequality, and favours capital owners, while overall government revenues decline. The latter is attributable to the insufficient expansion of alternative tax bases (profits, sales, and wages) after a tariff cut. This limits the government’s capacity to mitigate the adverse distributive effects arising from tariff reductions.