Import tariff transmission in a production network | Makram Khalil, Pierre M. Rouillard, Felix Strobel

KUALA LUMPUR, 28 AUGUST 2026 —

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Background and Scope Import tariffs have increasingly become a key instrument of trade policy, especially in the United States, where they are often justified on the grounds of protecting domestic industries. However, the broader macroeconomic consequences of tariff changes remain poorly understood, particularly in economies with tightly interlinked production networks. The Bundesbank discussion paper “Import tariff transmission in a production network” (Khalil, Rouillard & Strobel, 2026) addresses this gap by analysing how tariff shocks affect domestic economic activity when industries are connected through input‑output linkages. Using a panel of 71 U.S. manufacturing sectors from 2004‑2020, the study quantifies the transmission of tariff changes through both backward (input‑cost) and forward (demand‑spillover) channels.

Methodology and Key Findings The authors combine detailed product‑level tariff data with input‑output tables to construct sector‑specific tariff shocks and measure each industry’s exposure to these shocks via production linkages. A panel local‑projection framework is employed to estimate the dynamic effects of tariff changes on industrial output and producer prices, controlling for industry‑specific characteristics and aggregate shocks. The analysis identifies two distinct transmission channels. First, tariffs on imported intermediate goods raise input costs for downstream industries, acting as a negative supply shock that raises producer prices and, after a lag, reduces output. Second, tariffs that directly affect certain sectors reduce their production, which in turn lowers demand for the goods of upstream suppliers, generating negative demand spillovers that depress both output and prices in those upstream industries. Both channels are associated with a contraction in manufacturing activity, and the indirect effects are economically significant, amplifying the initial impact of tariff shocks across the network.

Implications for Malaysia While the study focuses on the U.S. manufacturing sector, its findings have relevance for Malaysia, a country with a integrated production network in electronics, automotive components and palm‑oil derivatives. Malaysia’s manufacturing output is heavily dependent on imported intermediate inputs such as electronic components and precision machinery. A rise in U.S. tariffs on these inputs would increase production costs for Malaysian firms that export to the U.S., potentially leading to higher producer prices and reduced output. Conversely, if U.S. tariffs target Malaysian‑produced goods, the resulting decline in U.S. demand could trigger upstream demand‑side spillovers that reduce orders for Malaysian suppliers of raw materials and components. The dual supply‑ and demand‑side effects highlighted in the paper suggest that Malaysian manufacturers may experience both higher input costs and lower export demand, compounding the negative impact on the sector.

Sector‑Specific Considerations The paper’s sector‑level analysis shows that industries with high backward exposure—those that rely heavily on imported intermediate inputs—suffer the most from tariff‑induced cost shocks. In Malaysia, the electronics assembly sector, which imports a large share of its components, would likely face significant cost pressures. On the other hand, sectors with strong forward linkages—those that supply inputs to tariff‑affected industries—could experience demand contractions. For example, Malaysian automotive component manufacturers that supply parts to U.S. assembly plants may see reduced orders if U.S. tariffs on automotive components rise. The study’s emphasis on the structure of inter‑industry linkages underscores the need for Malaysian policymakers to monitor both input and output linkages when assessing the potential impact of U.S. tariff changes.

Outlook The Bundesbank paper concludes that tariff shocks propagate through production networks in ways that amplify their initial effects, affecting both supply and demand sides of the economy. For Malaysia, this means that any future U.S. tariff adjustments could have broader repercussions than the direct tariff‑affected sectors alone. Policymakers should therefore consider strategies to diversify export markets, reduce reliance on imported intermediate inputs, and strengthen domestic supply chains to mitigate the indirect spillovers identified in the study. While the paper does not provide specific policy prescriptions, its methodological framework offers a useful tool for forecasting the potential macroeconomic impact of tariff changes on Malaysia’s manufacturing sector.

References Khalil, M., P. M. Rouillard & F. Strobel (2026), Import tariff transmission in a production network, Bundesbank Discussion Paper No 23/2026.

Related: Bundesbank