Casualties of Trade Wars

Kara Reynolds and Benjamin Liebman

No 2022-01, Working Papers from American University, Department of Economics

Abstract: Although trade wars have existed throughout modern history, there is little empirical evidence as to how countries choose which products to target for retaliatory tariffs. We develop a political economy model of trade policy to explain a country’s choice of product for retaliation and test the implications of this model using the choices of seven countries in two retaliation episodes: (1) the US imposition of steel and aluminum tariffs in 2018 and (2) the US passage of the Continued Dumping and Subsidy Offset Act (CDSOA) in 2000. The empirical results indicate that countries are more likely to sanction products with higher trade values and those in which they can extract terms-of-trade welfare, suggesting that trade wars move countries back to a terms-of-trade driven prisoner’s dilemma equilibrium. We find a significant amount of heterogeneity in the degree to which countries consider the political importance of producers when developing their retaliation list; for example, only the EU and Canada targeted products produced in politically important locales in 2018.

Keywords: retaliation; trade wars; political economy of trade protection (search for similar items in EconPapers)
JEL-codes: F13 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-int and nep-pol
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Citations: View citations in EconPapers (1)

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https://doi.org/10.17606/3mk8-5267 First version, 2022 (application/pdf)

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Journal Article: Casualties of trade wars (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:amu:wpaper:2022-01

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