Tariffs and Retaliation: A Brief Macroeconomic Analysis

Stéphane Auray, Michael Devereux and Aurélien Eyquem

No 33739, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We quantify the macroeconomic effects of the tariff measures announced (but not entirely implemented yet) on Liberation Day (April 2nd, 2025) through the lens of a New-Keynesian two-country model calibrated to the US and the rest of the world. We study both a unilateral 10pp tariff increase and a global trade war scenario with retalia- tory tariffs of a similar magnitude. In either case, tariffs are always sharply contractionary for US GDP, increasing inflation and widening the trade deficit. Measured in welfare terms a unilateral tariff generates gains for the US due to a large terms of trade appreciation, but these US welfare gains vanish with global retaliation. Three features of the model are critical in the evaluation of the tariff impact - the asymmetry in size and openness between the US and the rest of the world, the endogenous response of monetary policy to the inflationary effects of tariffs, and the importance of trade in intermediate goods for the scale of the global response to a tariff shock.

JEL-codes: F30 F40 F41 (search for similar items in EconPapers)
Date: 2025-05
New Economics Papers: this item is included in nep-dge
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