are roughly 3.85 percentage points (48 percent of the median tariff) lower for partners with high versus low DVA.

As noted earlier, the possible endogenous response of _DV A_<sup>_i_</sup> _xjt_<sup>to</sup><sup>_ti_</sup> _xjt_<sup>is a threat to causal</sup> identification. To address this endogeneity concern, we instrument for DVA in two different ways.

We first instrument for ln( _DV A_<sup>_i_</sup> _xjt_<sup>) using domestic value added from</sup><sup>_i_used in the services</sup> sector in country _j_ , which we denote ln( _DV A_<sup>_i_</sup> _zjt_<sup>)andverballyrefertoasDVA-in-Services.</sup> This instrument is relevant, since there are likely common supply-side factors that make _i_ an attractive input supplier for _j_ across many sectors. It is also valid, in that _t_<sup>_i_</sup> _xjt_<sup>has</sup> no direct influence over value-added input use by the service sector in country _j_ , and so ln( _DV A_<sup>_i_</sup> _zjt_<sup>) is plausibly uncorrelated with the tariff equation residual.As a concrete example,</sup> the identification assumption is that the amount of US value added used by India in the services sector is not determined by the US import tariff on textiles from India. Results using this DVA-in-Services instrument are presented in Panel B of Table 3. Not only do the OLS results from Panel A hold up, but they are actually strengthened when when we instrument for domestic value-added content. This suggests that the mechanical endogeneity concerns described above are not inflating our estimates, and if anything that countervailing concerns – such as measurement error – may be biasing the non-IV results toward zero.

To corroborate this analysis, we examine the same set of IV-regressions for a second, alternative instrument: the level of domestic value added in foreign production in 1970, which we denote ln( _DV A_<sup>_i_</sup> _sj,_ 1970<sup>)andverballyrefertoasDVA-in-1970.Thisinstrumentis</sup> plausibly valid in that 1970 predates the introduction of the preference schemes observed in our data; thus, DVA-in-1970 cannot mechanically be a function of contemporary tariff preferences.<sup>46</sup> We present IV results using this second instrument in Panel C of Table 3. Not only does the DVA coefficient remain and significant after instrumenting, the IV estimate is again is larger in absolute value than the OLS estimate. All together, these results point to a causal relationship running from domestic value added in foreign production to tariffs. In Appendix C, we examine a number of alternative specifications with additional bilateral control variables (e.g., distance, colonial history, etc.) that further bolster this interpretation.

> 46Using the data set developed in Johnson and Noguera (2014), we measure bilateral DVA-in-1970 for two composite sectors: agriculture and manufacturing. Due to missing data for Russia and Taiwan, the sample for which we can construct this instrument is roughly 30 percent smaller than our baseline sample. This is one cost of using this instrument. A second cost is that there is no time-variation in the instrument, in contrast to DVA-in-Services. On the other hand, this cost is counterbalanced by additional cross-industry variation in this instrument. In the end, this instrument isolates different exogenous variation than does the DVA-in-Services instrument.

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