Tariffs and Trade Deficits

Lorenzo Caliendo, Samuel Kortum and Fernando Parro
Additional contact information
Lorenzo Caliendo: Yale University
Samuel Kortum: Yale University
Fernando Parro: University of Rochester

No 2448R1, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We develop a dynamic multi-country Ricardian trade model with aggregate uncertainty, where trade imbalances emerge as countries exchange goods and assets. We introduce a method for computing counterfactuals in this setting, which doesn't require specifying the stochastic process of shocks or solving for asset prices. Applying the model to tariff shocks, we quantify their effects on prices, income, spending, and trade imbalances. We find that higher U.S. tariffs reduce the U.S. trade deficit through general equilibrium adjustments, but raise domestic prices and lower real consumption. Our findings highlight that movements in trade imbalances are shaped by the structure of global trade and finance, and that attempts to influence external balances through changes in trade barriers carry significant implications for real economic outcomes.

Pages: 43 pages
Date: 2025-08-25
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cowles.yale.edu/sites/default/files/2025-09/d2448r1.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:2448r1

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().