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date: 29 February 2024

Tariffs and the Macroeconomylocked

Tariffs and the Macroeconomylocked

  • Xiangtao Meng, Xiangtao MengEconomics, University of California, Davis
  • Katheryn N. RussKatheryn N. RussEconomics, University of California, Davis
  •  and Sanjay R. SinghSanjay R. SinghEconomics, University of California, Davis

Summary

For hundreds of years, policymakers and academics have puzzled over how to add up the effects of trade and trade barriers on economic activity. The literature is vast. Trade theory generally focuses on the question of whether trade or trade barriers, like tariffs, make people and firms better off using models of the real economy operating at full employment and a net-zero trade balance. They yield powerful fundamental intuition but are not well equipped to address issues such as capital accumulation, the role of exchange rate depreciation, monetary policy, intertemporal optimization by consumers, or current account deficits, which permeate policy debates over tariffs. The literature on open-economy macroeconomics provides additional tools to address some of these issues, but neither literature has yet been able to answer definitively the question of what impact tariffs have on infant industries, current account deficits, unemployment, or inequality, which remain open empirical questions. Trade economists have only begun to understand how multiproduct retailers affect who ultimately pays tariffs and still are struggling to meaningfully model unemployment in a tractable way conducive to fast or uniform application to policy analysis, while macro approaches overlook sectoral complexity. The field’s understanding of the importance of endogenous capital investment is growing, but it has not internalized the importance of the same intertemporal trade-offs between savings and consumption for assessing the distributional impacts of trade on households. Dispersion across assessments of the impacts of the U.S.–China trade war illustrates the frontiers that economists face assessing the macroeconomic impacts of tariffs.

Subjects

  • International Economics
  • Macroeconomics and Monetary Economics

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