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Tariffs and Retaliation

Quantitative work on optimal tariffs, tariff wars, trade deficits, and the welfare effects of retaliation in general equilibrium.

tariffsretaliationtariff wartrade deficitoptimal tariff

A large country may raise its own welfare by using tariffs to improve its terms of trade, provided foreign policy remains fixed. Retaliation weakens that price gain, production networks transmit the distortions across borders, and lower trade volumes shrink the tariff base. The studies collected here compare the unilateral gain with the costs that follow when trading partners respond.

Unilateral tariffs and their limits

The Liberation Day tariffs paper estimates a welfare-maximizing U.S. tariff of roughly 19 percent, applied uniformly. This is a unilateral benchmark: foreign governments hold their policies fixed. The Liberation Day schedule instead varied tariff rates with bilateral deficits. A schedule based on bilateral deficits does not approximate the welfare-maximizing tariff; it pursues a different objective.

The revenue paper asks whether tariff revenue can substitute for domestic taxation. Trade taxes cover at most 16 percent of government revenue. Their Laffer curve peaks early and then falls steeply once trade volumes, production, and other general-equilibrium outcomes adjust.

Tariff wars

Once foreign governments retaliate, the relevant benchmark is a Nash equilibrium rather than a unilateral optimal tariff. The global tariff war paper provides sufficient-statistics formulas for the welfare cost of this equilibrium. The cost has approximately doubled in the past 15 years as trade integration has left countries more exposed to a breakdown in cooperation.

The quantitative models consistently assign the largest losses to small downstream economies. These countries have little market power, but they face the higher input costs generated by tariff wars among larger economies.

From tariffs to cooperation

Trade instruments also interact. The interdependence paper shows that constraints on export subsidies induce partial tariff liberalization, whereas constraints on tariffs do not produce reciprocal liberalization on other margins. Trade agreements that cover several instruments can therefore deliver more liberalization than tariff-only rules. The welfare losses from retaliation provide a separate rationale for cooperation.

Related papers

Making America Great Again? The Economic Impacts of Liberation Day Tariffs

This paper evaluates the 2025 Liberation Day tariff package in a quantitative trade framework. It finds that retaliation turns modest unilateral gains into sizable U.S. and global losses.

Can Trade Taxes be a Major Source of Government Revenue?

This paper quantifies how much governments can realistically raise through tariffs. It finds that market power is limited, retaliation is costly, and the fiscal case for protectionism is much weaker than advocates suggest.

The Cost of a Global Tariff War: A Sufficient Statistics Approach

This paper develops a tractable way to estimate the cost of a global tariff war using observable shares, trade elasticities, and markup wedges. It shows that tariff-war losses and the gains from cooperation both rose sharply over time.

Interdependence of Trade Policies in General Equilibrium

This paper shows that restricting one trade policy instrument changes how governments use the others. That interdependence means the welfare effects of trade reform depend on the full policy menu, not one tariff cut in isolation.

Direct-answer pages

Question

Do Tariffs Reduce Trade Deficits?

Tariffs can shift bilateral trade balances but do not reliably reduce the aggregate deficit. The relevant policy criterion is welfare, not a bilateral balance.

Question

Optimal Tariff vs Retaliatory Tariff

An optimal tariff holds foreign policy fixed, while retaliatory tariffs arise in a strategic equilibrium. The quantitative outcomes differ sharply.

Key questions

Do tariffs help if partners do not retaliate?

A country with market power over its terms of trade can obtain a modest unilateral gain from a well-designed tariff. The U.S. optimum is about 19 percent and uniform, and the calculation holds foreign policy fixed. Retaliation, markup distortions, and supply-chain effects can erode or reverse the gain.

Why is retaliation so important?

Retaliation reduces the tariff-imposing country's terms-of-trade gain, shrinks its trade-tax base, and disrupts production networks. In the global tariff war model, Nash tariffs lower welfare for nearly all participants, with the largest losses in small downstream economies.