Tariffs, Productivity and Resource Misallocation

Abstract This paper documents a strong empirical link between trade protection and the misallocation of capital among import-competing domestic firms. Using a decade of tax administrative data from South Africa, the different sources of capital dispersion in 71 manufacturing industries are disentangled and a strong relationship between import tariffs and firm-specific distortions is found. A one-standard-deviation increase in import tariffs leads to aggregate productivity losses of 2.8 to 6.2 percent through this mechanism. This is driven by correlated distortions, whereby inefficient producers command a larger share of resources in industries that are more protected, and a greater dispersion in markups. The estimated effects are larger when controlling for heterogeneity in production technologies and undetectable when considering standard measures of misallocation, such as the dispersion in the average productivity of capital.