The third-country effects of trade wars

Matthieu Darracq Pariès, Valentin Jouvanceau and Aurélien Eyquem

No 3213, Working Paper Series from European Central Bank

Abstract: We study how trade wars propagate to countries that are not directly targeted. We develop a three-country New Keynesian model with trade in final and intermediate goods, incomplete asset markets, and asymmetric monetary regimes, and quantify the spillovers of the 2025 U.S.-China tariff escalation to the euro area. A bilateral U.S.-China trade war generates large and asymmetric welfare losses for the U.S. and China, while the euro area benefits temporarily from trade diversion. Once tariffs extend to euro-area goods, third-country welfare flips into losses and the Chinese downturn deepens. Welfare-maximizing retaliatory tariffs by the euro area deliver only modest domestic improvements, at the cost of large additional losses for the U.S. and China. Overall, the global incidence of trade policy is intrinsically multilateral: third-country gains under bilateral protectionism are short-lived, reverse once protection broadens, and cannot be inferred from two-country analysis. JEL Classification: F30, F40, F41

Keywords: protectionism; third-country effects; trade wars (search for similar items in EconPapers)
Date: 2026-04
Note: 604093
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263213

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