Tariffs and Politics: Evidence from Trump’s Trade Wars

In a recent CESifo Working Paper, Thiemo Fetzer and Carlo Schwarz studied how countries designing a retaliation response face a trade-off between maximizing political targeting and mitigating domestic economic harm. To quantify the degree of political targeting and to shed more light on underlying trade-offs, the authors developed a novel simulation approach that constructs a host of alternative retaliation baskets that the EU, China, and other countries could have chosen.

Illustration: Containerschiff

Key issue

The presidency of Donald Trump marked the onset of an aggressive US trade policy. This culminated in a trade war, which escalated from March 2018 onward, with the US imposing tariffs on steel and aluminum imports, along with a host of other tariffs specifically targeted at China. How the rest of the world responded to this escalation is the subject of a new paper “Tariffs and Politics: Evidence from Trump’s Trade Wars.” In accordance with WTO rules, many countries retaliated with tariffs of their own, targeting US exports. What can we learn from the way third countries designed their retaliation? And was retaliation optimally chosen?  

Approach and methodology

We observe that retaliation is sharply targeted to hit areas in which Donald Trump won significant electoral gains relative to Mitt Romney in 2012 (but not other Republican candidates standing for election for the Senate or House on the same election day in 2016). To quantify the degree of political targeting and to shed more light on underlying trade-offs, we develop a novel simulation approach that constructs a host of alternative retaliation baskets that the EU, China, and other countries could have chosen. This approach not only confirms the previous targeting results, but also allows us to analyze whether the retaliating countries consider the potential negative impacts that retaliation may have on their own economy.  

Key findings and conclusions

The EU is particularly effective at meeting both objectives, realizing a high degree of political targeting while minimizing likely economic damage to its own economy. For China and the NAFTA countries, it appears that retaliation was likely suboptimal: there are alterative retaliation responses that produce a similar degree of political targeting with a lower level of likely economic damage to their own economy.

The paper also sheds some light on whether retaliation was effective.  Studying US trade flows, our results suggest that each month USD 2.55 billion worth of US exports did not take place or were diverted as a result of retaliation. Further, we do find some mild evidence indicating that President Trump’s approval ratings declined in areas more affected by retaliation and that Republican candidates fared worse in the 2018 midterm elections.

Authors

Thiemo Fetzer  thiemo.fetzer@gmail.com
Carlo Schwarz  c.r.schwarz@warwick.ac.uk

Publication

Fetzer, Thiemo and Carlo Schwarz, "Tariffs and Politics: Evidence from Trump’s Trade Wars", CESifo Working Paper No. 7553, March 2019. PDF Download

 

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