Free DP Download 21 March 2019: Tariffs and Politics: Evidence from Trump's Trade Wars

Thursday, March 21, 2019

Tariffs and Politics: Evidence from Trump's Trade Wars
Thiemo Fetzer and Carlo Schwarz
CEPR DP No. 13579 | 11 March 2019

Countries against which Donald Trump has declared a trade war have responded with retaliatory tariffs directly targeted at parts of the United States that swung to the president in the 2016 election (but not to other Republican candidates running for office that year). What’s more, this retaliation has been effective: in areas exposed to retaliation, Republican candidates fared worse in the 2018 midterm elections; and presidential approval ratings have declined, especially among Democrats.

These are among the conclusions of new CEPR research by Thiemo Fetzer and Carlo Schwarz, which explores whether retaliatory tariffs are politically targeted and, if so, how effective they are. Focusing on the recent trade escalation between the United States, the other NAFTA countries (Canada and Mexico), China and the European Union, the study examines the trade-off for countries designing a retaliatory response between maximising political targeting and mitigating domestic economic harm.

For China and particularly, for Mexico and Canada, the chosen retaliation seems to be sub-optimal: there are alternative retaliation bundles that would have produced a higher degree of political targeting, while posing a lower risk of damage to their own economies. Nevertheless, retaliation has produced substantial economic shocks: US exports of goods subject to retaliation declined by up to $15.28 billion in 2018 and export prices have dropped significantly.

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