Tariff-Substitution Elasticity Map

Problem solved

When a tariff lands on the primary origin in an HS6 line, the question for procurement officers, trade-association strategists, and country export-promotion teams is which alternate supplier captures the redirected demand, in what magnitude, and on what timeline. The framework produces an HS6-by-HS6 elasticity map across third-country suppliers, with capacity gating and rules-of-origin filters.

Inputs

• BACI 1995 to 2024 HS6 bilateral trade flows (CEPII)
• USTR Section 301, Section 232, IEEPA tariff event series with effective dates
• Capacity proxies by HS6 by partner: production data, export portfolio breadth, prior peak shipment
• Rules-of-origin restrictions by trade agreement (USMCA, KORUS, TPP-11, etc.)
• Logistics indicator: average lead time, container availability, port capacity
• WITS tariff schedule for the substitute origin pairs

Outputs

• Substitution elasticity matrix: redirected import share captured by each candidate origin, by HS6
• Capacity-gated forecast: how much of the redirected demand can each origin actually supply within 6, 12, and 24 months
• Rules-of-origin filter: which substitutes pass FTA preference rules and which do not
• Confidence bands at HS6 and HS chapter aggregation
• Shortfall map: HS6 lines where the entire alternate-origin universe cannot absorb redirected volume within 24 months

Method

1. Step 1. Stack the BACI panel by HS6 by importer by exporter, monthly where Comtrade-Plus is available, otherwise annual. Drop HS6 lines with fewer than 10 active partners or under 5 million dollars in annual baseline trade.
2. Step 2. Identify substitution events. Any combination of (importer, HS6, exporter) where a tariff effective date crosses the panel becomes an event. The 2018-2024 Section 301 panel is the largest single source of identification.
3. Step 3. Estimate the substitution elasticity. Difference-in-differences with HS6, importer, exporter, and time fixed effects. The treatment is the tariff-applicable origin; the candidates are the other origins active in the same HS6 line. The coefficient on each candidate is its substitution elasticity.
4. Step 4. Capacity-gate the elasticity. The pre-event capacity of each candidate origin (production, prior peak shipment, export portfolio breadth) caps how much of the redirected demand can be absorbed within 6, 12, and 24 months. Above the cap, the substitution lands at a price premium that the framework reports separately.
5. Step 5. Filter through rules of origin. For each candidate substitute, check the rules-of-origin compliance under the relevant FTA. Substitutes that fail the yarn-forward rule (textiles), the regional value content rule (automotive), or the substantial transformation test (general) drop out.
6. Step 6. Logistics overlay. Apply lead-time and port-capacity gates. A candidate origin that lacks the container capacity at the right port pair gets a quantity haircut.
7. Step 7. Build the substitution map. Report by HS6 the top three candidate origins, their substitution share at 6, 12, 24 months, the rules-of-origin pass/fail flag, and the capacity headroom.

Assumptions

• The 2018-2024 Section 301 panel is informative for forward substitution behavior in similar HS chapters. Where the policy environment is materially different (sanctions versus tariffs, primary product versus manufactured goods), the framework reports a sensitivity case using IEEPA-era and Section 232 events as alternative panels.
• Capacity proxies are imperfect. The framework uses the maximum of (recent peak shipment, available production capacity, export portfolio breadth) as the cap.
• Rules-of-origin compliance is observable through certificates of origin where reported. Where not reported, the framework applies the published preference rule as a hard filter and flags the assumption.
• Logistics constraints bind in the first 6 months and gradually relax. The 12 and 24 month windows assume container and port capacity adjust.

Limitations

• Transshipment and labeling fraud are observed in the data but underestimated. The framework reports a transshipment-adjustment range based on customs enforcement priors.
• New entrants (countries with zero baseline trade in an HS6 line) cannot be estimated within the panel framework. They are added as a structured-judgment case based on capacity-build announcements.
• Quality differentiation within HS6 is not fully captured. Vietnamese knit apparel and Chinese knit apparel both sit in HS 6109; the framework runs a hedonic adjustment as a robustness case.
• FTA renegotiation can move rules of origin within the engagement window. The framework reports the substitution map under both current and announced rules.

Example application

Applied to Vietnamese apparel exports under the 2024 Section 301 expansion. The Substitution Map runs the seven steps on HS chapters 61 and 62, identifies Vietnam, Bangladesh, India, Indonesia, and Cambodia as the five candidate substitutes for Chinese-origin US-bound apparel, and reports the HS6-level capture share at 6, 12, and 24 months. Bangladesh captures more than its capacity allows in the 6 month window, creating the price premium the brief documents. See Vietnam apparel substitution post China decoupling.