Tariffs and Trade Agreements
Paper Session
Saturday, Jan. 3, 2026 2:30 PM - 4:30 PM (EST)
- Chair: Sebastien Bradley, Drexel University
Monetary stabilization of sectoral tariffs
Abstract
This paper studies the optimal monetary stabilization of tariffs using a two-country, two-traded sector New Keynesian model, where tariffs imply inefficient sectoral reallocation as well as changes in aggregate output and inflation. The main finding is that nominal exchange rate manipulation can be a useful tool to help offset some of the distortions implied by tariffs. We find that the Ramsey optimal monetary policy response to a tariff on imports of differentiated goods implies a domestic currency appreciation to offset the tariff’s distortion on import prices. In our benchmark two-country environment, it is efficient for this exchange rate appreciation to be implemented primarily through monetary expansion in the foreign country; the monetary response in the home country is typically small and can be either mildly expansionary or contractionary depending on the trade elasticity. In cases where the exchange rate is not an operative tool, such as an environment where prices are sticky in the local currency, or where tariffs impact sectors with flexible prices, the Ramsey optimal response instead tries to stabilize home demand for imports through aggregate demand expansion.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, combining theory-consistent and narrative sign restrictions on Bayesian structural vector autoregressions. Tariffs depress economic activity, both in the aggregate and across sectors and states. Uncertainty lowers imports and investment but raises exports. Both shocks tend to increase consumer prices and reduce employment. Both are macroeconomically relevant, explaining on average 5–10 percent of fluctuations in GDP. Historically, the 1990s free trade agreements triggered a prolonged investment and output boom, while widening the trade deficit. Undoing post-2016 protectionism would raise output by an additional 3 percent.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