## Are Capital Goods Tariffs Different?

_IMF Working Papers, May 22, 2020_

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## Bibliographic details
- Authors: Sergii Meleshchuk, Yannick Timmer
- Published: May 22, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513545271.001

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### Key findings
- Firms exposed to a reduction in intermediate and consumption input or output tariffs do not significantly increase their investment rates.
- Firms’ investment rate increases strongly in response to a reduction in capital goods input tariffs.
- Firms do not substitute capital with labor; they also increase employment, especially for production workers, in response to lower capital goods input tariffs.
- Reduction in other tariff rates do not increase investment and employment.
- A reduction in the relative price of capital goods can significantly boost investment and employment and does not seem to lead to a decline in the labor share.

### Identification and empirical context
- Empirical strategy uses exposure to a quasi-natural experiment induced by a trade reform in Colombia.
- Focus differentiates capital goods tariffs from other tariffs (intermediate and consumption input or output tariffs).

### Implications for firms and labor
- Lower capital goods input tariffs raise firms’ investment rates.
- Employment rises alongside investment, with a notable increase among production workers.
- No evidence of capital-for-labor substitution; labor share does not appear to decline following reductions in capital goods tariffs.

### Policy implications
- Trade reforms that lower capital goods input tariffs can be an effective lever to stimulate firm investment.
- Such tariff reductions can also support employment growth without reducing the labor share.
- Policymakers should distinguish capital goods tariffs from other tariffs when designing trade liberalization to maximize investment and employment gains.

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_Source: https://www.imf.org/en/publications/wp/issues/2020/05/22/are-capital-goods-tariffs-different-49282_