Modeling the dynamic effects of tariffs on economic variables and trade policies

Hemendra Pal ()
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Hemendra Pal: Royal Holloway University of London

Future Business Journal, 2025, vol. 11, issue 1, 1-14

Abstract: Abstract Tariffs, a key instrument of trade policy, are often viewed as tools to correct trade imbalances or protect domestic industries. However, their effects on an economy extend beyond immediate price changes, triggering complex feedback loops that unfold over time. This study explores tariffs as a feedback control mechanism within an economic system, emphasizing their role in influencing key variables such as inflation, trade balances, consumption, and monetary policy. By modeling these interactions using delayed differential equations (DDEs), the research demonstrates how time lags in economic adjustments — such as the delayed effects of tariffs on inflation and trade volume can amplify or attenuate the initial impact of policy changes. The feedback loop suggests that tariffs, while raising prices and reducing trade volume in the short term, also lead to inflationary pressures, which may prompt central bank responses, such as interest rate adjustments. These adjustments, in turn, affect investment and consumption, further influencing the economy. The research provides both a theoretical and practical framework for understanding the dynamic and delayed nature of tariffinduced economic changes, with insights into how policymakers can better anticipate and manage the consequences of trade policies. This model offers a comprehensive understanding of the broader economic adjustments and the role of time lags in shaping the long-term impact of tariffs on global trade and national economies.

Keywords: Tariffs; Trade policy; Inflation; Trade balances; Monetary policy; Delayed - differential equations (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1186/s43093-025-00507-9

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