America first? The macroeconomic implications of punitive tariffs in a production network model

Abstract Since 2018, tariffs have re-emerged as a tool for protecting domestic economies, particularly in the US. This paper examines the macroeconomic and welfare effects of various import tariff scenarios using a four-region dynamic general equilibrium model with a multi-sectoral production network. The scenarios include unilateral US tariffs, coordinated US-EU tariffs, Chinese retaliation, Europe’s non-participation, and sector-specific versus broad tariffs. Our results show that tariffs initially boost domestic value-added output by making local goods relatively cheaper. While consumption can increase permanently, the output benefits are short-lived. Increased production costs and reduced global income largely offset the output gains over time. Tariff-targeted countries have an incentive to retaliate, and when they do, these output/consumption gains do not materialize. As a result, welfare effects are negative. Regardless of direct involvement in tariff conflicts, the rest of the world suffers from reduced aggregate income. The effects of tariffs and strategic interactions depend on which sectors are subject to tariffs. Overall, tariffs appear to be an inefficient tool for economic protection due to the high probability of retaliation.