Tariffs, productivity and resource misallocation

Tariffs, productivity and resource misallocation, published in The World Bank Economic Review, uses a decade of South African tax administrative data to document a strong link between trade protection and the misallocation of capital among import-competing firms. It finds that import tariffs are associated with greater capital distortions, particularly in industries where less productive firms hold a disproportionate share of resources. Applying a structural model, the authors show that a one-standard-deviation increase in tariffs reduces aggregate productivity by between 2.8 and 6.2 percent. The paper highlights how protectionist policies can distort resource allocation and emphasises the need for careful consideration of productivity impacts when designing trade policy.