Enterprise development
Working paper

Tariffs, productivity, and resource misallocation

Michael Kilumelume, Bruno Morando, Carol Newman, and John Rand
December 2021

An often-neglected potential negative consequence of tariffs is the impact they may
have on the misallocation of factor inputs. Trade protection can provide space for domestic firms
to increase prices and mark-ups, allowing low-productivity firms to survive, thereby leading to a
sub-optimal allocation of resources.

This paper explores the impact of tariffs on the allocation of capital using administrative data from South Africa. We find that tariffs are highly correlated with capital misallocation, leading to aggregate productivity losses of 5–10 per cent. In particular, tariffs are strongly related to distortions that are correlated with firm productivity. The main channel through which tariffs distort the allocation of capital is through the protection they offer to lowproductivity firms, reducing their probability of exiting and increasing firm survival.

Download SA-TIED Working Paper #204