Tariff Incidence: Evidence from U.S. Sugar Duties, Douglas Irwin Dartmouth College & NBER

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1 Tariff Incidence: Evidence from U.S. Sugar Duties, Douglas Irwin Dartmouth College & NBER

2 Who bears the burden of import tariffs? Charles Bickerdike, EJ (1906)

3 Tariff incidence: what do we know? Computational Evidence CGE models imply large terms of trade effects Costinot & Rodriguez-Clare (2013) US, Ireland: 20% Elasticity Evidence Broda, Limão, & Weinstein (AER 2008) Correlation of tariffs and export supply elasticities Belarus, Latvia, Lebanon, Lithuania, Ukraine? Paraguay and Algeria have more market power than China and Russia? Optimal tariffs of %? Olarreaga et al 2013 optimal tariffs 4% Empirical Evidence Winkelmann & Winkelmann (JIE 1998) New Zealand is a small country

4 Previous U.S. Studies Study Goods Data Pass-through to consumer prices Sales Taxes Poterba (1996) 3 goods Quarterly 100% Besley & Rosen (1999) 12 goods Quarterly > 100% Tariff Changes Kreinin (1961) 1956 GATT Round Annual 50% Feenstra (1989) 2 goods Monthly 60% for trucks 100% for motorcycles

5 Why pre-1930? Unilateral tariff changes (no bargaining) Large tariff changes (up & down) No exchange rate variation (gold standard)

6 Why sugar? U.S. plausibly a large country 20-25% of world consumption Cuba major supplier (20-30% of US sugar) Cuba depends on US market (exports 95%+ to US) Unique price data One place: New York City Landed and wholesale price of 96 raw sugar High frequency: weekly, daily

7 U.S. share of world sugar consumption

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10 Market structure Cuban supply Perfectly competitive US demand Sugar refiners in New York Highly competitive oligopoly Genesove & Mullin (Rand 1998)

11 New York sugar refining

12 Ad valorem tariff on raw sugar ad valorem rate

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14 Weekly sugar prices 7 6 cents per pound Cuba New York

15 Estimation approach Weekly log p i 5 = α + j=1 β j log(1 + τ) j + ε i = landed price, customs-cleared price Plus month, year fixed effects Monthly Control for wholesale prices, industrial production

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18 cents per pound New York price Cuban price (c.i.f.) Feb Mar Apr 1891

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20 cents per pound New York price Import price (Cuba, c.i.f.) Aug 1894 Sep

21 New York price 3 Import price (Cuba, c.i.f.) June July Aug 1897

22 New York price Import price (Cuba c.i.f.) Dec-03 Jan-04

23 New York price 2.5 Import price (Cuba, c.i.f.) Jan Feb Mar Apr 1914

24 Daily prices (1914) New York price Import price (Cuba c.i.f.) Feb Mar

25 Summary Year Tariff Change Incidence of Tariff Change Domestic Prices Import Prices % 4% % 59% % 64% % 22% % 0%

26 Asymmetric response Common Finding Exchange rates (Nakamura & Zerom RESt 2010) Gasoline (Borenstein, Cameron, Gilbert QJE 2007) All prices (Peltzman JPE 2000) Possible explanations Seasonality Inventories Pricing-to-market Sugar: not durable or storable but shiftable

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28 Monthly Imports

29 percentage change from previous yaer 250 Asymmetric demand response

30 Check using monthly data Unit values (only import price) Higher level of aggregation Tariff reduction consistent with no impact Tariff increase unclear, less precision

31 Price at Month of Tariff Change = 100 Monthly import prices (different series)

32 Pass-through to granulated sugar prices Only significant pass-through is in 1891 Lower frequency price changes Absorbed through markup adjustment?

33 Interwar period Three tariff increases (1921, 1922, 1930) Philippines granted duty free access Trade diversion terms of trade loss for Cuba Chang & Winters (AER 2002)

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35 Ad valorem tariff on raw sugar ad valorem rate

36 Weekly sugar prices cents per pound Cuba New York

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38 1921 tariff increase of 0.6 cents per pound Increase of 0.2 cents 4 New York Cuba Mon 5/23 Tues 5/24 Wed 5/25 Thur 5/26 Fri 5/27 Mon 5/30 Tues 5/31 Wed 6/1 Thurs 6/2 Fri 6/3

39 tariff increase of cents per pound From 4.61 cents to 4.77 cents NY Cuba Mon 9/18 Tues 9/19 Wed 9/20 Thurs 9/21 Fri 9/22 Mon 9/25 Tues 9/26 Wed 9/27 Thur 9/28 Fri 9/29

40 1930 tariff increase of cents per pound Decline of 0.23 cents Thurs 6/12 Fri 6/13 Mon 6/16 Tues 6/17 Wed 6/18 Thurs 6/19 Fri 6/20 Mon 6/23 Tues 6/24 Wed 6/25 Thurs 6/26 Fri 6/27

41 Effect on Sugar Market in 1930 Imports (billions of pounds) (import share in parenthesis) Average import price (per pound) Cuba Philippines Cuba Philippines Pre-Smoot-Hawley 5.52 (77%) 1.56 (22%) 1.8 cents 3.4 cents Post Smoot- Hawley 4.81 (74%) 1.73 (27%) 1.2 cents 3.0 cents Percentage Change -12.8% +10.5% -33% -11%

42 Price gap: Philippine-Cuban Sugar Smoot-Hawley

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44 Conclusion Asymmetric incidence of tariff changes Reductions: 100% pass-through Increases: 40% percent pass through Asymmetric demand response Forward shifting of imports with tariff increase Little postponement with tariff decrease

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46 The Smoot-Hawley Tariff of 1930

47 Cane sugar tariff Sugar imported from the Philippines & Cuba Philippines given duty free access Tariff on Cuban sugar hiked from 104% to 175%

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52 Why no price impact? Cuban Exports Change United States 513, , , % Other markets 122, ,505-22,399-18%

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54 Bagwell-Staiger (2010) the empirical relevance of terms-of-trade manipulation is much greater than has been widely believed....most countries, even apparently small countries, have significant ability to alter their terms of trade on many imported products with their tariff choices.