Tariffs and Trade Deficits

Lorenzo Caliendo, Samuel Kortum and Fernando Parro

No 34003, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a dynamic multi-country Ricardian trade model with aggregate uncertainty, where countries trade goods and assets, leading to trade imbalances. We introduce a method for computing counterfactuals in this setting without specifying the stochastic process of shocks or solving for asset prices. Applying the model to tariff shocks, we quantify their effects on prices, income, expenditure, 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.

JEL-codes: F10 F11 F13 F40 (search for similar items in EconPapers)
Date: 2025-07
Note: ITI
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Citations: View citations in EconPapers (1)

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