An examination of the domestic macroeconomic consequences of the United States' trade policies

Luisa Carpinelli () and Sergio Santoro ()
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Luisa Carpinelli: Bank of Italy
Sergio Santoro: Bank of Italy

No 965, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper analyses the domestic effects of U.S. trade policies, focusing on the 2018-19 trade war and the escalation of trade tensions in 2025. In 2018-19, the U.S. imposed tariffs on just short of 18 per cent of imports, mainly from China, raising the effective tariff rate vis-à -vis the latter from 3 to 11 per cent. These tariffs mostly raised costs for U.S. consumers and firms, with near-complete pass-through to import prices, higher consumer prices, supply-chain disruptions, and job losses. Trade diversion reduced reliance on China but left the overall U.S. trade deficit broadly unchanged, while subsidies to farmers offset part of the fiscal revenues. General equilibrium estimates point to modest but non-negligible output and welfare losses. The 2025 trade war represents a qualitatively different shock: tariffs now cover most products and countries, with effective rates at 19 per cent overall and above 40 per cent for China (the latter potentially exceeding 100 per cent if truces are not renewed), and could cause input costs to rise sharply across industries. Preliminary evidence suggests partial tariff absorption by exporters, and also a substantial pass-through to U.S. consumer prices. The dollar's unexpected depreciation is in contrast with historical patterns and could set in motion more pronounced trade balance effects; fiscal revenues will be much larger. Looking ahead, uncertainty remains high. A failure to extend truces and to deliver on the trade deals could lead to shortages of critical inputs and reinforce inflationary pressures; also, it would reignite the risk of retaliation – which has been limited, so far – potentially triggering a global demand shock.

Keywords: tariffs; trade policy (search for similar items in EconPapers)
JEL-codes: F10 F13 F40 (search for similar items in EconPapers)
Date: 2025-09
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