cc @monacelt.bsky.social @aauclert.bsky.social @kalemli-ozcan.bsky.social @baldwinre.bsky.social @pkrugman.bsky.social @ivanwerning.bsky.social @jzettelmeyer.bsky.social @zsoltdarvas.bsky.social @martinsandbu.ft.com

The paper goes through a battery of alternative scenarios and sensitivity tests:
* for US monetary and fiscal policy,
* tariff persistence,
* international trade invoicing (DCP vs PCP),
* trade elasticities,
* retaliations and
* risk premium shocks.
Check it out! 12/12

App. B2 lays out a simpler NK model, looking at the flex-price equilib. to derive an AS-AD framework for permanent tariffs. It highlights the diff bw complete mkts (@monacelt.bsky.social , 2025) and incomplete mkts (Jeanne&Son, 2024): tariffs shift AD out but also hurt AS, lowering GDP 11/12

US tariffs on non-EU countries generate indirect spillovers to the EU via trade diversion, slightly deepening the short-term economic losses in Europe (via lower competitiveness vis-a-vis 3rd countries), but contributing positively later on (due to market share within the US) 10/12

Global trade patters are reshuffled, as the fall in US-bound exports is partly compensated by European exporters gaining market share in third countries at the expense of less competitive American firms. 9/12

EU GDP takes a moderate hit, driven mainly by lower exports to the US.

A weaker (more competitive) European ToT softens the fall in EU exports, and reins in import demand...

...but the ToT-loss also erodes the purchasing power of EU incomes, weighing on consumption. 8/12

But with the extra tariff revenues eventually handed back to households as tax cuts or transfers, the US ToT-gain represents an increase the purchasing power of domestic incomes.

Despite this, US real GDI (real GDP + ToTgain) would still fall as production is hit by tariffs 7/12

Although tariff revenues generate fiscal space for the US gov, only 1/4 of the burden falls on foreigners in the form of a US terms-of-trade gain.

The rest falls on US firms and households, who face lower real incomes through higher consumer prices or reduced profit margins 6/12

Monetary tightening in response to inflationary pressures weighs on domestic demand for investment and consumption, an important transmission channel (as also argued by @monacelt.bsky.social ).

As exports fall along with imports, US trade deficits are reduced only temporarily. 5/12

Excess demand for domestic products puts a strain on the economy's resources, leading to a terms-of-trade appreciation, which offsets a quarter of the direct effect of tariffs on after-tax relative prices, and crowds out exports by eroding the competitiveness of US firms. 4/12

Rather than aiding domestic production, tariff hikes weaken the US economy:

while tariffs shift demand from imports towards US-produced goods (expenditure switching)...

...they also act as an adverse supply shock by making imported inputs costlier. 3/12

With the tariffs the US government hopes to achieve a range of policy goals:
* boosting domestic manufacturing production,
* reducing the US trade deficit,
* and raising budgetary revenues which it claims would be ”paid by foreigners".

This paper looks at these in turn. 2/12

So these "reciprocal tariffs" are cumulative on the 20% China already got, but not on sectoral tariffs on cars and steel&aluminium?

Also, what about Russia?

Are we to understand these "reciprocal tariffs" as coming *in addition to* already announced "other tariffs" (e.g. 20% on China, or 25% on steel&aluminim and 25% on cars)? Or the highest rate of overlapping tariff regimes applies?

(Of course, EU-level central budget would help the single currency as well, to more easily achieve the desired fiscal stance when monetary policy is constrained by the ZLB.)