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Tariffs and Trade Deficits

Author

Listed:
  • Lorenzo Caliendo

    (Yale University)

  • Samuel Kortum

    (Yale University)

  • Fernando Parro

    (University of Rochester)

Abstract

This paper develops a complete-markets model to analyze the determinants of endogenous trade imbalances across countries. We introduce a framework where countries can trade in Arrow-Debreu securities to insure against different states of the world, which enables them to run deficits in some states and surpluses in others. The model allows for counterfactual analysis of various trade policy scenarios, such as unilateral tariff impositions. We derive the conditions under which trade deficits arise endogenously and discuss implications for welfare and trade policy analysis.

Suggested Citation

  • Lorenzo Caliendo & Samuel Kortum & Fernando Parro, 2025. "Tariffs and Trade Deficits," Cowles Foundation Discussion Papers 2448, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:2448
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    File URL: https://cowles.yale.edu/sites/default/files/2025-07/d2448.pdf
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    References listed on IDEAS

    as
    1. Steinberg, Joseph B., 2019. "Brexit and the macroeconomic impact of trade policy uncertainty," Journal of International Economics, Elsevier, vol. 117(C), pages 175-195.
    2. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799, Elsevier.
    3. George A. Alessandria & Yan Bai & Soo Kyung Woo, 2024. "Unbalanced Trade: Is Growing Dispersion from Financial or Trade Reforms?," NBER Working Papers 33101, National Bureau of Economic Research, Inc.
    4. Alan C. Stockman, 1988. "Fiscal Policies and International Financial Markets," NBER Chapters, in: International Aspects of Fiscal Policies, pages 197-228, National Bureau of Economic Research, Inc.
    5. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 197-261, Elsevier.
    6. Maximiliano Dvorkin & Fernando Parro & Lorenzo Caliendo, 2015. "The Impact of Trade on Labor Market Dynamics," 2015 Meeting Papers 1532, Society for Economic Dynamics.
    7. Stockman, Alan C. & Dellas, Harris, 1986. "Asset markets, tariffs, and political risk," Journal of International Economics, Elsevier, vol. 21(3-4), pages 199-213, November.
    8. Jonathan Eaton & Samuel Kortum & Brent Neiman & John Romalis, 2016. "Trade and the Global Recession," American Economic Review, American Economic Association, vol. 106(11), pages 3401-3438, November.
    9. Ljungqvist, Lars & Sargent, Thomas J., 2012. "Recursive Macroeconomic Theory, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262018748, December.
    10. Doireann Fitzgerald, 2012. "Trade Costs, Asset Market Frictions, and Risk Sharing," American Economic Review, American Economic Association, vol. 102(6), pages 2700-2733, October.
    11. Lorenzo Caliendo & Fernando Parro, 2015. "Estimates of the Trade and Welfare Effects of NAFTA," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(1), pages 1-44.
    12. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
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    Cited by:

    1. Eduardo Dávila & Andrés Rodríguez-Clare & Andreas Schaab & Stacy Tan, 2025. "A Dynamic Theory of Optimal Tariffs," NBER Working Papers 33898, National Bureau of Economic Research, Inc.
    2. Ignatenko, Anna & Lashkaripour, Ahmad & Macedoni, Luca & Simonovska, Ina, 2025. "Making America great again? The economic impacts of Liberation Day tariffs," Journal of International Economics, Elsevier, vol. 157(C).

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    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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