Tariffs, Employment and the Balance of Trade

Sweder van Wijnbergen

No 22121, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The literature on tariffs is mostly static and focused on tariffs on consumer goods. We show that the macroeconomic consequences of tariff policies depend crucially on the type of goods over which tariffs are levied and on the time pattern of the tariffs. Under full employment, the trade-balance effect of tariffs depends critically on their time structure. With endogenous investment, tariff shocks may improve the trade balance but do so by crowding out investment. Tariffs on intermediate imports (typically about 50\% of all imports) cause output and investment to fall and the trade balance to deteriorate. The objectives that trade-policy advocates typically list together — a smaller trade deficit and higher domestic investment — are mutually exclusive. When tariffs are levied under unemployment, we show that even the sign of the impact depends crucially on the root cause of unemployment.

Keywords: Tariffs; Intermediate goods; Real exchange rate; Employment; Trade balance (search for similar items in EconPapers)
JEL-codes: F1 F32 F41 (search for similar items in EconPapers)
Date: 2026-11
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