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Tariffs and politics: evidence from Trump's trade wars

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  • Thiemo René Fetzer
  • Carlo Schwarz

Abstract

Are retaliatiory tariffs politically targeted and, if so, are they effective? Do countries designing a retaliation response face a trade-off between maximizing political targeting and mitigating domestic economic harm? We use the recent trade escalation between the US, China, the European Union (EU) and the North American Free Trade Agreement (NAFTA) countries to answer these questions. We find substantial evidence that retaliation was directly targeted to areas that swung to Donald Trump in 2016 (but not to other Republican candidates running for office in the same year). We further assess whether retaliation was optimally chosen using a novel simulation approach constructing counterfactual retaliation responses. For China and particularly, for Mexico and Canada, the chosen retaliation appears suboptimal: there exist alternative retaliation bundles that would have produced a higher degree of political targeting, while posing a lower risk to damage the own economy. We further present evidence that retaliation produces economic shocks: US exports on goods subject to retaliation declined by up to USD 15.28 billion in 2018 and export prices have dropped significantly. Lastly, we find some evidence suggesting that retaliation is effective: in areas exposed to retaliation Republican candidates fared worse in the 2018 Midterm elections, and similarly Presidential approval ratings, especially among Democrats, have declined.

Suggested Citation

  • Thiemo René Fetzer & Carlo Schwarz, 2019. "Tariffs and politics: evidence from Trump's trade wars," CESifo Working Paper Series 7553, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_7553
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    References listed on IDEAS

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    More about this item

    Keywords

    trade war; tariff; targeting; political economy; elections; populism;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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