Trade Policy

A tariff affects more than the price of imports. It changes the terms of trade and the tax base, interacts with markups in domestic and foreign production, and raises costs along input-output networks. Climate-related measures add environmental externalities that cross borders. The studies collected here measure these channels and ask when unilateral policy raises welfare and when countries gain from cooperation.

Tariffs, retaliation, and the limits of unilateral policy

The textbook optimal tariff uses a country's market power to improve its terms of trade. The Liberation Day tariffs paper estimates a welfare-maximizing uniform tariff of roughly 19 percent for the United States, well below the rates imposed in April 2025. That 19 percent benchmark holds foreign policy fixed. Once trading partners retaliate, U.S. welfare gains shrink and global employment falls by 0.58 percent. Full-scale retaliation lowers welfare by as much as 3.4 percent in some economies.

The global tariff war paper derives sufficient-statistics formulas for the cost of Nash tariff wars. These costs have roughly doubled over 15 years as trade integration has deepened. The largest losses fall on small downstream economies that depend on global supply chains but have little market power of their own.

Tariff revenue and the tax base

Tariffs cannot readily replace domestic taxes. The revenue paper finds that, even under favorable assumptions, trade taxes replace at most 16 percent of government revenue before retaliation. Retaliation removes roughly half of that revenue. Raising trade taxes further causes GDP to fall by about 7 percent. Reduced trade volumes, a deterioration in the terms of trade, and production reallocation all erode the tax base; partial-equilibrium revenue calculations omit these responses.

Policy interdependence and trade agreements

Trade instruments are interdependent. The interdependence paper shows that constraints on export subsidies induce partial liberalization of import tariffs. Constraints on tariffs do not generate a symmetric liberalization of export policy. This asymmetry matters for the design of trade agreements, since a rule that covers one policy margin may not induce liberalization on the others.

Climate and trade

When carbon emissions cross borders, unilateral carbon pricing can shift production toward unregulated jurisdictions. The climate and trade policy paper evaluates border carbon adjustments and climate clubs as corrective instruments. Trade policy can reduce some leakage, but the gains depend on coalition size and the structure of global supply chains. In the quantitative analysis, coordination is more effective than unilateral border taxes. Work on tariff retaliation reaches the same conclusion about the value of cooperation.