Can Protective Tariffs Induce Industrial Consolidations? Theory and Evidence from the Great Merger Movement

Abstract

In the late 19th century United States, trusts emerged across a wide range of industries amid high-tariff protectionism. Since then, economists have debated the relationship between protective tariffs and industrial consolidations. However, beyond the anecdotal, empirical evidence linking the two remains scarce. I revisit the question in the context of the Great Merger Movement of the late 19th and early 20th century. I construct a new dataset of consolidations in manufacturing industries, drawing extensively on historical sources to classify them at a detailed product level. My empirical strategy exploits two sources of variation. First, I leverage changes in tariff policy driven by party turnover as a source of plausibly exogenous variation in tariff levels. Second, I measure industry exposure to tariff changes using industries’ dutiable status and import intensity. I find that industries more strongly affected by tariff changes experienced greater surges in consolidations following tariff increases. To make sense of these findings, I build an incentive-constrained coalitional model of endogenous market structure that allows for the presence of import competition. I show that, in industries where the price of imports acts as an effective ceiling for domestic producers, higher tariffs can indeed strengthen incentives to merge and induce consolidation.