Trade Policy

Trade policy is, at bottom, a problem of second-best optimization in general equilibrium. A government choosing tariffs faces market power on the terms of trade, markup distortions in domestic and foreign production, input-output linkages across sectors, and, increasingly, environmental externalities that cross borders. The research collected here quantifies each of these channels and asks when unilateral action helps, when it backfires, and when cooperation becomes the only defensible option.

Tariffs, retaliation, and the limits of unilateral policy

The textbook optimal tariff exploits a country's market power over its terms of trade. The Liberation Day tariffs paper puts a number on this: for the United States, the welfare-maximizing uniform tariff is roughly 19 percent, far below the rates actually imposed in April 2025. But even that 19 percent benchmark assumes no retaliation. Once trading partners respond, U.S. welfare gains shrink and global employment contracts by 0.58 percent. Full-scale retaliation produces welfare losses as large as 3.4 percent for some economies.

The global tariff war paper derives sufficient-statistics formulas for the cost of Nash tariff wars and shows that these costs have roughly doubled over 15 years as trade integration has deepened. Small downstream economies, those embedded in global supply chains without much market power of their own, bear the largest losses.

Revenue and fiscal illusions

Can tariffs replace income taxes? The revenue paper finds that the answer is mostly no. Even under favorable assumptions, trade taxes replace at most 16 percent of government revenue before retaliation. After retaliation, roughly half of that revenue disappears. Pushing further causes GDP to fall by about 7 percent. The fiscal case for tariffs is weaker than it appears in partial equilibrium precisely because general-equilibrium feedbacks (reduced trade volumes, terms-of-trade deterioration, production reallocation) erode the tax base.

Policy interdependence and trade agreements

Restricting one trade instrument does not leave others unchanged. The interdependence paper demonstrates that when export subsidies are constrained, governments partially liberalize import tariffs as well. But constraining tariffs alone does not produce symmetric liberalization on the export side. This asymmetry matters for the design of trade agreements: rules that target only one margin may fail to deliver broad liberalization.

Climate and trade

When carbon emissions are the externality, unilateral carbon pricing leaks production to unregulated jurisdictions. The climate and trade policy paper evaluates border carbon adjustments and climate clubs as corrective instruments. Trade policy can partially address leakage, but the quantitative gains depend on coalition size and the structure of global supply chains. Coordination remains more effective than unilateral border taxes, a finding that echoes the retaliation results in the tariff literature.