America first? The macroeconomic implications of punitive tariffs in a production network model

Anne Ernst, Natascha Hinterlang, Marius Jäger and Nikolai Stähler

No 10/2026, Discussion Papers from Deutsche Bundesbank

Abstract: Since 2018, tariffs have re-emerged as a tool for protecting domestic economies, particularly in the US. This paper examines the macroeconomic and welfare effects of various import tariff scenarios using a four-region dynamic general equilibrium model with a multi-sectoral production network. The scenarios include unilateral US tariffs, coordinated US-EU tariffs, Chinese retaliation, Europe's non-participation, and sector-specific versus broad tariffs. Our results show that tariffs initially boost domestic value-added output by making local goods relatively cheaper. While consumption can increase permanently, the output benefits are short-lived. Increased production costs and reduced global income largely offset the output gains over time. Tariff-targeted countries have an incentive to retaliate, and when they do, these output/consumption gains do not materialize. As a result, welfare effects are negative. Regardless of direct involvement in tariff conflicts, the rest of the world suffers from reduced aggregate income. The effects of tariffs and strategic interac- tions depend on which sectors are subject to tariffs. Overall, tariffs appear to be an inefficient tool for economic protection due to the high probability of retaliation.

Keywords: Tariffs; Trade Conflict; Protectionism; International Trade; DynamicGeneral Equilibrium Model; Production Network (search for similar items in EconPapers)
JEL-codes: D57 E27 F12 F13 F40 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:340010

DOI: 10.71734/DP-2026-10

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