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Export pricing and the macroeconomic effects of US import tariffs

Published online by Cambridge University Press:  01 January 2020

Ulf D. Slopek
Ulf D. Slopek*
Affiliation:
Deutsche Bundesbank, Directorate General Economics
*
E-mail: ulf.slopek@bundesbank.de
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Abstract

We modify NiGEM in order to study the macroeconomic effects of imposing import tariffs in the US under different assumptions regarding the long-run price setting behaviour of exporters. Overall, the macroeconomic implications in the US resemble the impact of a cost shock or adverse supply shock as prices increase while output declines. Due to exchange rate movements and changes in the prices of traded goods, prices and output in other economies tend to move in the same direction. We demonstrate that the size and persistence of the macroeconomic impact following the introduction of new tariffs critically hinge upon the specific assumptions underlying the behaviour of export prices. If foreign exporters are concerned about their net-of-tariff prices, there will be little adjustment after the initial surge in tariff-inclusive export prices. As a result, the adverse macroeconomic impact will be large and persistent both in the US and abroad. While additional government spending financed by tariff revenues could mitigate the adverse impact on the protectionist economy in the short run, retaliation by its trading partners would worsen the outcome. Our simulations also raise doubts about the ability of protectionist measures to rein in global imbalances.

Keywords

NiGEMprotectionspilloversE37F13F41F47
Type
Research Articles
Information
National Institute Economic Review , Volume 244 , May 2018 , pp. R39 - R45
Copyright
Copyright © 2018 National Institute of Economic and Social Research

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Footnotes

The opinions expressed herein are those of the author and do not necessarily reflect those of the Deutsche Bundesbank. The author thanks Garry Young, Iana Liadze, Rebecca Piggott, Johannes Hoffmann, John Goodall, Markus Jorra, Markus Kühnlenz, and Diana Mathew for helpful comments and suggestions.

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