Tariffs and Trade Agreements
Paper Session
Saturday, Jan. 3, 2026 2:30 PM - 4:30 PM (EST)
- Chair: Sebastien Bradley, Drexel University
What is the Optimal Monetary Policy Response to Tariffs 2.0?
Abstract
As the U.S. administration launches a new round of tariffs, central banks around the world are grappling with the question of how to respond. The question is complicated by the fact that objectives of stabilizing inflation and stabilizing output can conflict in the presence of tariff shocks. This question is further complicated by the fact that the new round of tariffs impact a broader range of goods than in the previous Trump administration, covering a wide array of differentiated final goods in addition to materials such as aluminum and steel.This paper studies the Ramsey optimal monetary stabilization of tariff shocks using a two-country New Keynesian model enriched with elements from the trade literature, including multiple traded sectors that differ in terms of market structure and price rigidity. One sector produces differentiated goods, which are typically associated with monopolistic competition, price markups, and sticky prices; the other sector produces non-differentiated goods, associated with higher elasticities of substitution, perfect competition and flexible prices.
Our overall conclusion is that the optimal monetary response to tariffs is expansionary, supporting activity and producer prices at the expense of generating short-run headline inflation. This prescription applies broadly, both for tariffs aimed at differentiated and non-differentiated goods, but with very different motivations in each of these two cases. For tariffs targeting differentiated final goods, optimal monetary policy uses currency depreciation to help offset the effects of tariffs on relative prices between home and foreign goods, and thereby counteract the impact of tariffs on aggregate GDP. In the case of tariffs targeting non-differentiated goods, while currency undervaluation cannot affect the relative prices of nondifferentiated goods across countries in the absence of price stickiness, optimal monetary policy alters the relative price between sectors within a country to hasten reallocation toward the differentiated goods needed to stabilize output.
Global Tariff Pass-Through: Which Firms Gain, Which Firms Lose?
Abstract
We investigate the heterogeneous effects of tariff changes on firm-level pricing behavior across countries, extending a methodology that we developed for exchange rate pass-through (ERPT) to the context of tariffs (Johns and Quinn, 2025). Using financial statement data from millions of firms across 47 countries (1995–2022), we estimate tariff pass-through (TPT) to domestic prices by modeling pass-through to firm-level markups in such a way to recover the structural parameters linking tariffs to prices without requiring transaction-level price data. We apply tariff rates to firms based on their primary sector and intermediate input sectors. We have several key findings. First, tariff pass-through is substantially higher for intermediate input tariffs than for final goods tariffs. Firms that rely heavily on imported intermediates exhibit a pass-through rate of approximately 25%, compressing their markups to absorb some of the cost increases. Domestic firms not importing intermediates—despite facing no direct input cost hikes—raise both prices and markups, suggesting opportunistic pricing responses and rent gains to smaller, less-global firms for tariff increases. Second, we find strong nonlinearities in pass-through. Tariff increases exhibit significant pass-through while tariff reductions show no statistically significant effect on prices. Exchange rate changes further shape the nonlinear tariff responses. Tariff hikes coupled with currency depreciations produce amplified pass-through effects (around 50%) and lead firms to reduce markups. In contrast, currency appreciations dampen tariff increase pass-through to around 15%. Tariff decreases, however, exhibit zero pass-through regardless of exchange rate movements. We separately examine U.S. firm responses to changes in U.S. tariffs and find that these results generally characterized U.S. TPT. Our results underscore how the effects of trade and macroeconomic policy shocks are influenced by firm-level heterogeneity and macroeconomic context in shaping how trade policy shocks are transmitted to domestic prices.Preferential Trade Agreements and Non-tariff Measures
Abstract
We study the product-level effects of Preferential Trade Agreements (PTAs) on the implementation of non-tariff measures (NTMs) using a global database spanning the 2000-2017 period. Employing an instrumental variable strategy, we provide evidence that an increase in the import share of PTA partners leads to a reduction in the application of NTMs. Exploring several mechanisms, we find that these effects are driven by products with higher preferential margins, the gap between MFN and preferential tariff rates. This result is consistent with what we call a "rent preservation effect," whereby PTA partner countries push to limit the imposition of NTMs in order to preserve their preferential rents. Importantly, higher PTA import shares contribute to multilateral liberalization by lowering both the usage of NTMs against PTA members and non-PTA partners.The Macroeconomic Consequences of Import Tariffs and Trade Policy Uncertainty
Abstract
We estimate the effects of import tariffs and trade policy uncertainty in the United States since the 1960s. We combine theory-consistent and narrative sign restrictions on Bayesian structural vector autoregressions. Restrictions are based on a two-country DSGE model and narrative information from key historical episodes of US protectionism.Tariffs depress economic activity, in aggregate and across sectors and states. Uncertainty lowers imports but raises exports. Both shocks increase consumer prices, while the employment effects are ambiguous. On average, tariffs are macroeconomically more important than trade policy uncertainty, explaining 10 and 5% of unexpected US output variations. Historically, NAFTA/WTO raised US output by 1-3% for twenty years. Results from local projections of disaggregated data on the tariff shocks suggest that imports, exports, and investment fall in nearly all sectors. Structural scenario analysis shows that undoing the 2018/19 protectionism would increase cumulative output by 4% over three years. The findings imply higher gains of free trade than partial equilibrium or static trade models.
Reallocation under Protectionism: Firm-Level Evidence from a Trade Shock
Abstract
This paper studies how temporary trade protection reshapes domestic market structure through firm reallocation. We develop a model of monopolistic competition with heterogeneous firms in which tariffs—experienced either directly or via value chains—generate asymmetric shocks, trigger exit, and reallocate market shares. Using administrative data from Ecuador’s 2015–2017 safeguard tariff episode and a quantile treatment effect estimator, we show that fully exposed firms in the bottom revenue decile experienced losses of up to 85%, while larger firms expanded their market shares. Exit probabilities rose by nearly one percentage point among small, indirectly exposed firms. These dynamics led to substantial declines in market diversity—by 30% in Wholesale & Retail and 15% in Manufacturing—measured by richness and evenness in the market-share distribution. Our framework links micro-level shocks to macro-level concentration outcomes, offering new insights on the structural consequences of protectionist trade policy.JEL Classifications
- F1 - Trade