Trade Wars, Relative Economic Power, and Household Welfare

We develop a modified version of the Flam and Helpman (1987) framework of North–South trade in vertically differentiated products, by endogenizing the labour market participation decisions of heterogeneous households and allowing for tariffs to substitute for income taxes. The model reveals a fundamental asymmetry: while Northern tariffs depress labor force participation among low-ability households in the North, Southern tariffs do not generate comparable effects in the South. We demonstrate that the shift from the pre–Trump 2.0 environment of modest reciprocal tariffs to a Trump 2.0–style tariff war disproportionately harms low- and middle-income households in the North, whereas households in the South experience significantly smaller welfare losses. Furthermore, an escalated tariff conflict erodes the North’s relative economic power. Our results indicate that, from both a geopolitical and political economy perspective, the South is more resilient to a trade war.