In 2018, the United States imposed tariffs on steel and aluminum products of 25 and 10 percent, respectively, following an investigation that found that imports of these products posed a national security threat to the United States. By October of that year, six countries had imposed retaliatory tariffs on $120 billion of US exports, or slightly more than six percent of total US exports. For example, the European Union announced tariffs on large motorcycles, canoes and sinks; Canada announced tariffs on whiskey, orange juice, steel, and aluminum, among other products. Because retaliatory tariffs such as these can impose significant harm to producers and consumers alike, it is important for policy makers to understand how products are selected for retaliation.
In my most recent working paper with Benjamin Liebman, we develop a political economy model of trade policy to explain a country’s choice of product for retaliation and test the implications of this model using the choices of seven countries in two retaliation episodes: (1) the US imposition of steel and aluminum tariffs in 2018 and (2) the US passage of the Continued Dumping and Subsidy Offset Act (CDSOA) in 2000. We find that countries are more likely to sanction products with higher trade values and those in which they can extract terms-of-trade welfare, suggesting that trade wars move countries back to a terms-of-trade driven prisoner’s dilemma equilibrium. We also find a significant amount of heterogeneity in the degree to which US trading partners consider the political importance of the industry when choosing products for retaliation.
Download the most recent version of our working paper.
