Tariffs and Retaliation

The case for tariffs rests on terms-of-trade manipulation: a large country can shift world prices in its favor by taxing imports. The case against tariffs rests on what happens next. Retaliation eliminates the terms-of-trade advantage, production networks amplify the distortions, and the revenue that was supposed to justify the policy shrinks as the tax base contracts. The research here quantifies both sides of this ledger.

Unilateral tariffs and their limits

The Liberation Day tariffs paper calculates that the welfare-maximizing U.S. tariff is roughly 19 percent, applied uniformly. This is the unilateral benchmark; it assumes foreign governments hold policy fixed. The actual Liberation Day tariff schedule, which varied rates by bilateral deficit, departed sharply from this optimum. Bilateral-deficit-based tariff design does not approximate optimal policy; it reflects a different objective altogether.

The revenue paper examines whether tariff revenue can substitute for domestic taxation. At best, trade taxes cover 16 percent of government revenue. The constraint is not administrative; it is that the Laffer curve for trade taxes peaks early and falls steeply once general-equilibrium adjustments are accounted for.

Tariff wars

Once retaliation begins, the relevant benchmark shifts from optimal tariff to Nash equilibrium. The global tariff war paper provides sufficient-statistics formulas for the welfare cost of this equilibrium and documents that these costs have approximately doubled in the past 15 years. Deeper integration raises the stakes: countries that trade more intensively have more to lose from a breakdown in cooperation.

Small, downstream economies are the most vulnerable. They lack the market power to set favorable terms of trade, yet they absorb the input-cost increases generated by tariff wars among larger players. This distributional pattern (large countries initiate, small countries pay) is a robust feature of the quantitative models.

From tariffs to cooperation

The interdependence paper shows that trade instruments interact: restricting export subsidies induces partial tariff liberalization, but restricting tariffs alone does not produce reciprocal liberalization on other margins. This asymmetry underscores why trade agreements that cover multiple instruments outperform narrow tariff-only rules. The welfare arithmetic of retaliation is, in the end, the strongest argument for cooperative trade institutions.