Tariff Wars and Net Foreign Assets

Mark Aguiar, Manuel Amador and Doireann Fitzgerald

No 33743, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines whether and how international financial claims accumulated during a period of relatively free trade can be settled once a trade war erupts. We identify the conditions under which net claims can be honored even under balanced trade – or, in the extreme, autarky. The analysis also reveals a potential equilibrium multiplicity in which a trade war impoverishes one country while enriching its trading partner, with the identity of the winner and loser determined by a sunspot. The key adjustment mechanism is the tariff-induced shift in the terms of trade (and the corresponding real exchange rate), which revalues the relative gross asset positions to ensure that any residual trade is consistent with the inherited financial claims.

JEL-codes: F1 F13 F30 F32 F40 (search for similar items in EconPapers)
Date: 2025-05
New Economics Papers: this item is included in nep-ifn, nep-int and nep-opm
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