Trade Partners’ Responses to US Tariffs

Lorenzo Rotunno and Michele Ruta

No 2025/147, IMF Working Papers from International Monetary Fund

Abstract: Recently announced and enacted US tariffs reduce partners’ access to the US market and lead to trade diversion. Impacted countries may respond in (at least) three ways: imposing retaliatory tariffs on the US, resorting to industrial policy to support their producers, and/or signing trade agreements to find new market access opportunities. Relying on a quantitative trade model, we study the trade and welfare implications of these policy responses. Retaliation hurts US exports, can improve the terms of trade, but also creates distortions. Subsidies can expand exports, making up for lost markets in the US, but they are costly, increase distortions especially for the subsidizers, and worsen trade diversion effects that could eventually lead to new tariffs targeting subsidizers. Seeking deeper integration with other partners can help countries expand trade while reducing distortions. Even in presence of US tariffs, real income for the liberalizing countries and the world is higher when partners choose to deepen integration as part of their policy strategy.

Keywords: Tariffs; retaliation; industrial policy; trade agreements; trade diversion effect; welfare implication; US tariff; signing trade agreements; impacted country; Exports; Imports; East Asia; Global (search for similar items in EconPapers)
Pages: 42
Date: 2025-07-18
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