Are Tariffs an Economic Trump?

• Authors: Ana-Isabel Guerra and Ferran Sancho.
• BSE Working Paper: 1514 | September 25
• Keywords: tariffs , nonlinear input-output , barriers to trade
• JEL codes: F14, F47, D57, C67

Obstacles to free trade hinder economic growth and limit opportunities for optimizing resource allocation. While trade theory is clear on this point, a mindset associated with an assumed, albeit false, zero-sum game may possibly lead to confusing desires with the reality of interconnected economies. One major barrier to trade is tariffs, which raise the cost of imports to protect local industries from foreign competition. In this paper, we use the most recent input-output data from the United States to quantify the economy-wide effects of increased tariffs on imported goods. To capture the substitution effects between domestic and imported commodities at both the intermediate and final demand levels, we employ a novel nonlinear input-output model. In this model, each category of commodity is available in several varieties, with the final mix being driven by the interplay of domestic versus import prices while capturing vertical and horizontal substitution in demand.