Trade Under the Threat of Tariff Hikes in General Equilibrium

In this paper, I develop a multi-country, multi-industry dynamic stochastic general equilibrium model of trade with _x001c_rms that are heterogeneous in productivity, and which must incur a one time sunk cost to begin producing as well as a one time sunk cost to begin exporting to a new market. I model tari_x001b_s as stochastic, with the bilateral tari_x001b_ each period and for each country pair drawn from one of two possible values and where the draws follow a simple Markov process. I _x001c_nd that in this setting, fewer _x001c_rms choose to enter into the export market in equilibrium when there exists the threat of a tari_x001b_ hike relative to a deterministic setting where tari_x001b_s are _x001c_xed at their current value. Based on this model, I obtain numerical results for the impacts of an (exogenous) threat of reverting to a permanent non-cooperative tari_x001b_ level. In a symmetric two-country setting, the e_x001b_ects are a 4.55% reduction in trade and a 0.02% reduction in welfare. I am further able to derive the e_x001b_ect of a tari_x001b_ threat on third-countries and outside sectors not directly targeted, and _x001c_nd these e_x001b_ects to be small.