Trade Wars with Trade Deficits

Pau Pujolas and Jack Rossbach

Department of Economics Working Papers from McMaster University

Abstract: Trade imbalances significantly alter the welfare implications of tariffs. Using an illustrative model, we show that trade deficits enhance a country’s ability to alter its terms of trade, and thereby benefit from tariffs. Greater trade deficits imply higher optimal, or welfare maximizing, tariffs. We compute optimal unilateral and Nash equilibrium tariffs between the United States and China — the countries with the largest bilateral trade imbalance — using a multi-region, multi-sector applied general equilibrium model with service sectors and input-output linkages, a computationally complex task. We find the United States gains from such a trade war with China, albeit minimally.

Keywords: Trade War; Tariffs; Applied General Equilibrium; International Trade (search for similar items in EconPapers)
JEL-codes: F11 F13 F14 F17 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2024-11
New Economics Papers: this item is included in nep-cna
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Persistent link: https://EconPapers.repec.org/RePEc:mcm:deptwp:2024-09

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