The Macroeconomic Effects of US Tariff Hikes

US trade policy has taken a sharp protectionist turn under the second Trump administration, with the aim of boosting domestic manufacturing production, reducing the US trade deficit, and raising budgetary revenues ”paid by foreigners.” This paper assesses the macroeconomic consequences of recent US tariff announcements, based on quantitative simulations by the European Commission’s multi-region New Keynesian DSGE model, QUEST. Results indicate that, rather than aiding domestic production, tariff hikes weaken the US economy. While tariffs shift demand from imports towards US-produced goods, they also act as an adverse supply shock. In addition, the equilibrium terms-of-trade appreciation crowds out exports, and monetary tightening in response to inflationary pressures hurts domestic demand as well. Although tariff revenues generate additional fiscal space for the US government, only around a quarter of the burden falls on foreigners in the form of a US terms-of-trade gain. Finally, tariff hikes reduce US trade deficits only temporarily. The effects on EU GDP are moderately negative, driven mainly by weaker exports to the US. At the same time European exporters gain market share in third countries at the expense of less competitive American firms. US tariffs on other countries lead to trade diversion, slightly deepening the short-term economic losses in Europe, but reversing later on. A general tit-for-tat retaliation would deepen the negative impacts in both the US and the EU. Beyond the direct effects of tariffs, rising uncertainty and a loss of investor confidence in the US economy further aggravates the adverse economic consequences by tightening financing conditions. Sensitivity analyses highlight the role of tariff persistence, the currency of trade invoicing and the monetary policy response.