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America first? The macroeconomic implications of punitive tariffs in a production network model
- This paper investigates the macroeconomic and welfare implications of various tariff scenarios, including unilateral tariffs, retaliatory measures, and sector-specific tariffs. The research is motivated by the resurgence of protectionist policies and their potential to disrupt global trade and economic dynamics. By employing a four-region dynamic general equilibrium (DGE) model with a multi-sectoral production network, we provide insights into the strategic interactions of tariff conflicts and their economic consequences. The findings thus underscore the importance of global production networks when analyzing the implications of trade conflicts.
[Key insights] short-term gains, long-term losses
- The findings reveal that unilateral tariffs can temporarily boost domestic output and consumption in the imposing country by making local goods relatively cheaper. However, these benefits are short-lived. Over time, higher production costs and reduced global demand erode the initial gains. For instance, in a scenario where the US imposes unilateral tariffs on China, US output and consumption increase modestly in the short term. However, if China retaliates, these gains disappear, and both countries experience significant economic losses.
- We also find that the European Union and the rest of the world suffer indirect losses due to reduced global demand, even if they are not directly involved in the tariff conflict. In scenarios with broad tariffs, global welfare declines across all regions, with the most severe losses occurring in a scenario of escalated trade conflicts between the US, EU, and China.
[Key insights] short-term gains, long-term losses
- The findings reveal that unilateral tariffs can temporarily boost domestic output and consumption in the imposing country by making local goods relatively cheaper. However, these benefits are short-lived. Over time, higher production costs and reduced global demand erode the initial gains. For instance, in a scenario where the US imposes unilateral tariffs on China, US output and consumption increase modestly in the short term. However, if China retaliates, these gains disappear, and both countries experience significant economic losses.
- We also find that the European Union and the rest of the world suffer indirect losses due to reduced global demand, even if they are not directly involved in the tariff conflict. In scenarios with broad tariffs, global welfare declines across all regions, with the most severe losses occurring in a scenario of escalated trade conflicts between the US, EU, and China.
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