The Macroeconomic Implications of Increasing Tariffs on US Imports

Abstract:

Although specific proposals have yet to be announced, the president of the United States (US) has indicated that he is considering measures to introduce or increase tariffs on imports. The proposed policy shift, which may also entail fiscal measures to promote US exports, appears to be aimed at raising US output and employment growth, particularly in manufacturing, by reducing imports and raising exports, thus reducing the current account deficit. Its rationale seems to be based partly on the view that the US economy has suffered from multilateral trade agreements that have been disadvantageous, and also on the potential fiscal revenue gains from tariff increases, which could facilitate reductions in other taxes, particularly on corporations.

We use the National Institute’s Global Econometric Model (NiGEM) to run stylised scenarios to investigate the impact of increases in tariffs on US imports. In some scenarios, we assume that US tariff increases are immediately followed by retaliatory increases by trade partner countries of tariffs applied to imports from the US. Tariff increases are assumed to be applied by the US on imports from China, Canada and Mexico, which are the largest trading partners of the US, together with, in some scenarios, increases in tariffs on these countries’ imports from the US.

The following analysis of the implications of such increases in tariffs indicates that the effects on US macroeconomic variables would include a sustained reduction in GDP and real appreciation of the US dollar, together with a temporary widening of the external current account deficit and increase in inflation. These results are, of course, based on particular assumptions, including those embedded in our macroeconomic model. This analysis extends the work in Carreras and Ramina (2017), who focus on the literature regarding the macroeconomic implications of trade protectionism and illustrate this with a tariff applied to US imports just from China.

The authors would like to thank Simon Kirby, Oriol Carreras, Cyrille Lenoel, Rebecca Piggott and James Warren for helpful comments and suggestions.

NiGEM Observations is a series of occasional notes published by the NiGEM team on topical macroeconomic modelling issues for NIESR corporate sponsors and NiGEM subscribers.