America first? The macroeconomic implications of punitive tariffs in a production network model

Since 2018, tariffs have re-emerged as a tool for protecting domestic economies, particularly in the US. This paper examines the macroeconomic and welfare effects of various import tariff scenarios using a four-region dynamic general equilibrium model with a multi-sectoral production network. The scenarios include unilateral US tariffs, coordinated US-EU tariffs, Chinese retaliation, Europe's non-participation, and sector-specific versus broad tariffs. Our results show that tariffs initially boost domestic value-added output by making local goods relatively cheaper. While consumption can increase permanently, the output benefits are short-lived. Increased production costs and reduced global income largely offset the output gains over time. Tariff-targeted countries have an incentive to retaliate, and when they do, these output/consumption gains do not materialize. As a result, welfare effects are negative. Regardless of direct involvement in tariff conflicts, the rest of the world suffers from reduced aggregate income. The effects of tariffs and strategic interac- tions depend on which sectors are subject to tariffs. Overall, tariffs appear to be an inefficient tool for economic protection due to the high probability of retaliation.