| This paper uses detailed information on the imposition of the 2002 U.S. tariff on steel goods to: (i) estimate parameters that are a key component of applied general equilibrium (AGE) models of trade and (ii) quantify the tariff's effect on aggregate steel prices in the United States. Changes in trade policy, such as a new tariff or a free trade agreement, can be used to identify substitution elasticities between products from different source countries (i.e. Armington elasticities). I devise a strategy for estimating these elasticities employing highly disaggregated trade and production data, exploiting the fact that the tariff program varied both across sources within a given product, as well as across products for a given source. The tariff was designed from its outset to be impermanent; it was scheduled to last for three years and was, in fact, in effect for less than two. Consistent with the short duration of the tariff, I find that there was little entry or exit of countries from steel product markets following its imposition. Thus, I observe substitution among a set of countries that is essentially fixed, which is the type of substitution described and predicted by AGE models. This lack of entry and exit from the U.S. import market contrasts starkly with permanent free trade agreements such as NAFTA, which other studies have used to estimate Armington elasticities. There was a great deal of entry and exit of countries in U.S. import markets for various manufactures following NAFTA. Using an AGE model to estimate an Armington elasticity when there is a great deal of entry or exit from product markets can give elasticity estimates that are too large. Consistent with this observation, I estimate elasticities of 3-4, while estimates stemming from NAFTA or other permanent trade episodes typically range from 8-12. Finally, using my estimates of these elasticities, I propose and calculate a measure of the welfare cost of the steel tariffs, and find that the tariffs raised steel prices by 0.6 to 0.7 percent, at a cost of up to {dollar}600 million over the lifespan of the tariffs. |
