Tariffs, production networks and spillovers: the case of a US-China trade war

Pablo Aguilar, Matthieu Darracq Paries, Alistair Dieppe, Rubén Domínguez-Díaz, Antonio Eugenelo, José-Elías Gallegos and Javier Quintana
Additional contact information
Pablo Aguilar: European Central Bank
Rubén Domínguez-Díaz: Banco de España
Antonio Eugenelo: University of Oxford
José-Elías Gallegos: Banco de España
Javier Quintana: Banco de España

No 2632, Working Papers from Banco de España

Abstract: We study the short-run macroeconomic transmission of a US-China tariff war in an open economy multi-sector New Keynesian model with input-output linkages, sectoral nominal rigidities and heterogeneous currency invoicing. A reciprocal 10 percentage point tariff increase generates asymmetric incidence: the tariff-imposing country bears more of the inflationary burden, while the targeted country experiences the larger output contraction. Production networks amplify this contraction by propagating the shock beyond the directly tariffed bilateral margin. Currency invoicing further shapes transmission. Under heterogeneous invoicing, dollar-denominated border prices weaken the expenditure-switching role of exchange rates, deepening the contraction in China relative to producer-currency pricing and altering third-country spillovers. The euro area response is small in the aggregate, but only because positive trade-diversion margins are offset by weaker demand from China and multilateral adjustments. We then exploit the model’s sectoral structure by imposing tariffs on one Chinese sector at a time. Sectoral incidence is highly concentrated, but aggregate effects cannot be inferred from the directly tariffed sector alone: domestic propagation offsets own-sector gains in the United States, reinforces own-sector losses in China and leaves the euro area as a net object shaped by opposing trade margins. The results show that tariff incidence depends jointly on where the tariff lands, how the shock propagates through production networks and how invoicing governs border-price adjustment. A framework that combines these margins delivers a materially different assessment from one built on bilateral trade shares alone.

Keywords: tariffs; trade; dynamic stochastic general equilibrium; multicountry; networks; dominant currency pricing (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 F13 F41 F42 (search for similar items in EconPapers)
Pages: 78 pages
Date: 2026-09
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Related works:
Working Paper: Tariffs, production networks, and spillovers: the case of a US-China trade war (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2632e

DOI: 10.53479/44525

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