Working Paper: CEPR ID: DP13495
Authors: Wilko Bolt; Kostas Mavromatis; Sweder van Wijnbergen
Abstract: We study the global macroeconomic effects of tariffs using a multiregional, general equilibrium model, EAGLE, that we extend by introducing US tariffs against Chinese imports into the US, and subsequently Chinese tariffs against US imports into China, consistent with recent trade policies by the US and the Chinese governments. We abstract from tariffs on goods exported from the euro area, focusing on a US-China trade war. A unilateral tariff from the US against China dampens US exports in line with the Lerner Symmetry theorem but global output contracts. Global output contracts even further after China retaliates. The euro area benefits from this trade war. These European trade diversion benefits are caused by cheaper imports from China and improved competitiveness in the US. As price stickiness in the export sector in each region increases, the negative effects of tariffs in the US and China are mitigated, but the positive effects in the euro area are then also dampened.
Keywords: trade policy; exchange rates; trade diversion; local currency pricing
JEL Codes: E32; F30; H22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US tariffs on Chinese imports (F18) | decrease in US exports (F69) |
| decrease in US exports (F69) | contraction in global output (F62) |
| China retaliatory tariffs (F19) | deepen contraction in global output (F62) |
| US tariffs (F19) | Euro area benefits (F36) |
| price stickiness (L11) | mitigates negative impacts of tariffs in US and China (F69) |
| price stickiness (L11) | dampens positive effects in Euro area (O52) |