TradePartners’ResponsestoUSTariffs

LorenzoRotunnoandMicheleRutaWP/25/147

IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.

TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement.

2025

JUL

?2025InternationalMonetaryFund WP/25/147

IMFWorkingPaper

Strategy,Policy&Review

TradePartners’ResponsestoUSTariffsPreparedbyLorenzoRotunnoandMicheleRuta*

AuthorizedfordistributionbyMartinSommer

July2025

IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement.

ABSTRACT:RecentlyannouncedandenactedUStariffsreducepartners’accesstotheUSmarketandleadtotradediversion.Impactedcountriesmayrespondin(atleast)threeways:imposingretaliatorytariffsontheUS,resortingtoindustrialpolicytosupporttheirproducers,and/orsigningtradeagreementstofindnewmarketaccessopportunities.Relyingonaquantitativetrademodel,westudythetradeandwelfareimplicationsofthesepolicyresponses.RetaliationhurtsUSexports,canimprovethetermsoftrade,butalsocreatesdistortions.Subsidiescanexpandexports,makingupforlostmarketsintheUS,buttheyarecostly,increasedistortionsespeciallyforthesubsidizers,andworsentradediversioneffectsthatcouldeventuallyleadtonewtariffstargetingsubsidizers.Seekingdeeperintegrationwithotherpartnerscanhelpcountriesexpandtradewhilereducingdistortions.EveninpresenceofUStariffs,realincomefortheliberalizingcountriesandtheworldishigherwhenpartnerschoosetodeepenintegrationaspartoftheirpolicystrategy.

JELClassificationNumbers:

F12,F14

Keywords:

Tariffs;retaliation;industrialpolicy;tradeagreements.

Author’sE-MailAddress:

lrotunno@;

mruta@.

WearegratefultoDiegoCerdeiro,KennethKang,MartinSommer,andparticipantsattheIMFinternalseminarandBanquedeFrance“InternationalTradeandIndustrialPolicyinAchangingWorld”conferenceforusefulcommentsanddiscussions.TheviewsexpressedinthispaperarethoseoftheauthorsanddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement.

WORKINGPAPERS

Tradepartners’responsestoUStariffs

PreparedbyLorenzoRotunnoandMicheleRuta

1

1WearegratefultoDiegoCerdeiro,KennethKang,MartinSommer,andparticipantsattheIMFinternalseminarandBanquedeFrance“InternationalTradeandIndustrialPolicyinAchangingWorld”conferenceforusefulcommentsanddiscussions.TheviewsexpressedinthispaperarethoseoftheauthorsanddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement.

TradePartners’ResponsestoUSTari?s?LorenzoRotunno?MicheleRuta?

July3,2025

Abstract

RecentlyannouncedandenactedUStari?sreducepartners’accesstotheUSmarketandleadtotradediversion.Impactedcountriesmayrespondin(atleast)threeways:imposingretaliatorytari?sontheUS,resortingtoindus-trialpolicytosupporttheirproducers,and/orsigningtradeagreementsto?ndnewmarketaccessopportunities.Relyingonaquantitativetrademodel,westudythetradeandwelfareimplicationsofthesepolicyresponses.RetaliationhurtsUSexports,canimprovethetermsoftrade,butalsocreatesdistortions.Subsidiescanexpandexports,makingupforlostmarketsintheUS,buttheyarecostly,increasedistortionsespeciallyforthesubsidizers,andworsentradediversione?ectsthatcouldeventuallyleadtonewtari?stargetingsubsidizers.Seekingdeeperintegrationwithotherpartnerscanhelpcountriesexpandtradewhilereducingdistortions.EveninpresenceofUStari?s,realincomefortheliberalizingcountriesandtheworldishigherwhenpartnerschoosetodeepenintegrationaspartoftheirpolicystrategy.

JELclassi?cation:F12,F14.

KeyWords:Tari?s,retaliation,industrialpolicy,tradeagreements.

?WearegratefultoDiegoCerdeiro,KennethKang,MartinSommer,andparticipantsattheIMFinternalseminarandBanquedeFrance“InternationalTradeandIndustrialPolicyinAchangingWorld”conferenceforusefulcommentsanddiscussions.TheviewsexpressedinthispaperarethoseoftheauthorsanddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement.

?InternationalMonetaryFundandAix-MarseilleUniversity.Email:

lrotunno@

.Tel.:+(1)2026230083

?InternationalMonetaryFund.Email:

mruta@

.Tel.:+(1)2026230977

1

Introduction

Therecentannouncementsandimpositionofnewimporttari?sbytheUSadminis-trationhaveopenedapolicyandacademicdebateontheimpactsofthetari?sontheUS,itstradingpartnersandtheglobaleconomymoregenerally(

BaqaeeandMalm-

berg

,

2025

;

ClausingandLovely

,

2024

;

Bou?tetal.

,

2024

;

IMF

,

2025

;

WTO

,

2025

).Asthetari?sreshapetrade?ows,tradingpartnersmayadoptvariouspolicystrate-giestosupporttheirproducersandmitigatepotentialnegativespillovers.Thispaperquantitativelyassessesthetradee?ectsofUStari?sandexaminestheimplicationsofdi?erentpolicyresponsesbytradingpartners.

Thetari?simposedbytheUSwouldreduceaccesstoalargeexportmarketfortradingpartners,negativelyimpactingtheirtermsoftrade.Howaretheylikelytorespond?Inthispaper,weconsiderthreesetsofnon-exclusiveandnon-exhaustivepolicyresponses.First,tradepartnersmaychoosetoexploittheirownmarketpowerandimplementretaliatorytari?sonUSgoodstoo?setthenegativeterms-of-tradeexternality.Second,theycouldadoptindustrialpoliciestosupportdomesticproducersimpactedbydiminishedmarketaccessintheUSandbyincreasedimportcompetitioninthedomesticmarketduetothediversionoftrade?owsresultingfromUStari?s.Lastly,tradingpartnerscouldchoosetodeepeneconomicintegrationthroughnewandenhancedtradeagreementswithothercountries,creatingnewmarketopportunitiesfortheirproducers.

1

ThispaperemploysastandardquantitativetrademodeltoillustratethepotentialtradeandwelfareimplicationsofUStari?sanddi?erentpolicyresponsesoftradingpartners.Althoughthe?ndingsandthemagnitudesofthee?ectswouldvarydependingonthespeci?cpolicyscenariosassumed,ouranalysiso?ersastructuredwaytothinkaboutdi?erenteconomicchannelsthroughwhichthetari?sandthepolicyresponsesimpacttheworldeconomy,o?eringinsightsthatcanhelpevaluatingpolicyactions.

Thequantitativemodelutilizedinthisstudyisbasedon

CaliendoandParro

(

2015

),extendedtoallowforproductionsubsidies(seealso

Rotunnoetal.

(

2025

)and

Juetal.

(

2024

)).Thismodelfeatures?rmsthatuseasinglefactorofproductionandtradedintermediateinputs,operatingunderconstantreturnstoscaleandperfectcompetition.Themodelissolvedinchangesrelativetoabaselinewithpre-2025tari?sandiscalibratedfor73countriesandarest-of-the-worldaggregate,across20sectors(19goodssectorsandoneservicesectoraggregate),usingdatafromtheOECDTiVA

1Sincetheintroductionofnewimporttari?sbytheUSinFebruary2025,targetedcountrieshavehintedat,announcedoradoptedexamplesofthesethreepolicyresponses.CanadaandChinahaveim-plementedretaliatorytari?stargetedonproductsimportedfromtheUS.GovernmentsfromCanada,Korea,JapanandChinahaveannouncedgovernmentsupportmeasurestoeasethenegativeimpactofUStari?sontargeted?rmsandsectors(

Reuters

,

2025

;

Bloomberg

,

2025

;

AlJazeera

,

2025a

,

b

).China,JapanandKoreahaveintensi?edtalksaroundapossiblefreetradeagreement,supposedlyalsoinresponsetotheUStari?s(

ChoiandNohara

,

2025

),whiletheEUisconsideringnegotiationswithnewpartners,includingEastAsianeconomies(

France24

,

2025

).

2

inter-countryinput-output(ICIO)tablesfortrade?ows,ITCMacMap,TRAINS,and

Bown

(

2021

)fortari?s,and

Rotunnoetal.

(

2025

)forestimatesofsubsidyrates.

Themodelcapturestheaggregatetradeande?ciencye?ectsofchangesintari?s,bilateraltradecostsandotherindustrialpoliciesresultingfromthereallocationofre-sourcesacrosssectors.Thissettinghasthebene?tofsimplicity,allowingtheexercisetobetransparentonthekeymechanismsatworkinthegeneralequilibriummodel.Theimpactsshouldbeinterpretedaslong-rune?ectsderivedfromthecomparisonofsteady-stateequilibriainducedbydi?erentpoliciesbytheUSanditstradepartners.Giventhemodelassumptions,however,thesimulatede?ectsofthetari?sarelikelytorepresentalowerboundoftheactualimpacts,whichmayencompassstaticdistor-tionarynegativee?ectsduetoreducedmarketaccessandtheentryoflessproductive?rms(bothofwhichcanberepresentedinaMelitz-stylemodel(

Caliendoetal.

,

2023

)),aswellasdynamicfactorssuchaslowercapitalaccumulation(

Andersonetal.

,

2020

).

2

Inaddition,ourmodelfocusesonchangesinactualpolicies,therebyoverlookingthepotentiallysigni?cant(ande?ciency-reducing)e?ectsofincreasedtradepolicyuncer-tainty.

Fourcounterfactualpolicyscenariosareemployedtoexaminepotentialmedium-tolong-terme?ectsoftradeandindustrialpolicies.The?rstscenarioconsidersin-creasesinUSimporttari?sannounceduntilApril22025,consistentwiththereferencepointscenariousedintheWEOApril2025(

IMF

,

2025

).Theseincludethetari?simposedonChina,MexicoandCanada,andonimportsofsteel,aluminum,autoandautopartsbeforeApril2,andthecountry-speci?ctari?hikesannouncedonApril2,withtheassociatedproductexemptions.Theseroundsoftari?increaseswouldbringtheUSe?ectivetari?rateto25percent,withsigni?cantvariationacrosscountriesandsectors.Inanadditionalscenario,weconsidertari?announcementsuntilApril11,whichbroughtdownthecountry-speci?ctari?increasesannouncedonApril2to10percentagepoints,andincreasedthenominaltari?onimportsfromChinato125percent.

3

Theremainingthreescenariosincorporatevariousresponsesfromtradingpart-ners.The?rstscenarioassumesthatallcountrieswillenacttit-for-tatretaliatorytari?sonUSgoods.Thesecondscenarioassumesthatcountriesreallocatesubsidiestowardssectorsthatsu?erthegreatestreductioninexportsassimulatedundertheUStari?scenario.Finally,wesimulatean“economicintegration”scenario,whichin-cludesthefullimplementationofmajortradeagreementsrecentlysignedandunder

2In(

IMF

,

2025

,Box1.2),theoutpute?ectsofdi?erenttari?scenariosfoundwithavariantofthecomparativeadvantagemodelusedhereareindeedlowerthanthosefoundusingthemodelby

Caliendoetal.

(

2023

),andusingaDSGEmodelwhichemphasizesdynamicinvestmentresponses(

Kumhofetal.

,

2010

).

3AsofJune172025,theUSandChinahaveagreedtoa90dayspauseintheescalatedbilateraltari?sratesandloweredtheincreaseinthenominalbilateraltari?ratessinceApril2to10percentagepoints.TheUShasalsoloweredtari?increasesonimportsofcarsandmetalsfromtheUK,whileithasraisedtari?hikesonimportsofmetalsfromothercountriesto50percentagepoints.

PAGE

3

negotiation,suchasthosebetweentheEUandMercosur,UKandtheComprehen-siveandProgressiveAgreementforTrans-Paci?cPartnership(CPTPP)countries,andCanadaandIndia,aswellastheimplementationofagreementsthatauthoritiesareconsidering,suchastheEU-CPTPPandthedeepeningoftheRegionalComprehen-siveEconomicPartnership(RCEP).Additionally,thisscenarioconsidersareductioninintra-EUtradebarriersinlinewithestimatedtrendsfrom2010to2020(

Adilbish

etal.

,

2025

).EachresponsescenarioisintroducedseparatelyalongsidetheUStari?s,andweexplorethee?ectsofcombinedpolicyresponsesinextensions.

Theresultsfromthecounterfactualsimulationsunderscorethesigni?cantpoten-tialtradee?ectsoftheassumedUStari?s.Twomainimplicationsarisefromthe?ndings.First,theUSmovesclosertoaclosedeconomy,withthevalueofUSimportsdecliningby32percentandUSdomesticsalesincreasingby15percent.Second,thehighertari?sonChina,combinedwithvaryinglevelsofexposuretotheUSmarket(withCanadaandMexicobeingthemostexposed),leadtoareallocationoftrade?owsandadiversionofChineseexportstothirdmarkets.

Di?erentpolicyresponsesfromtradingpartnershavemarkedlydi?erentimplica-tionsforglobaltrade.Tit-for-tattari?retaliationresultsina49percentreductioninUSexportscomparedtoabaselinescenariowithoutUStari?s,asaccesstoforeignmarketsforUSgoodsisdiminished.However,theseretaliatorytari?sweakenthecom-petitivenessoftradingpartnersinglobalmarkets,astheyincreaselocalfactorpricesandmakeUSimportedinputsmoreexpensive.Incontrast,theincreaseinsubsidiestoworst-hitsectorsboostsproductionandexportsespeciallyinChina.China’sexportstolargemarketsincludingCanada,theUKandtheEUincreasethemost,drivenbyexport-orientedsectorssuchaselectronics,textileandothermanufacturing(includingfurnitureandprecisioninstruments).Economicintegrationisfoundtoenhanceexportsfromliberalizingcountries,particularlyamongEastAsiaeconomiesandEUcountries.

Thewelfaree?ectsindicatethataresponsestrategycenteredondeepeningeco-nomicintegrationistheonlyapproachthatenhancesglobalwelfareinthepresenceofUStari?s.Duetodistortionarye?ects,USandglobalrealincomedecreaseunderthebaselinescenarioinvolvingUStari?sonly.Tit-for-tatretaliationdeepenslossesfortheUS,withoutgeneratingnetincreasesinrealGDPforothercountriesandhenceaggravatingglobalwelfarelosses.Subsidiesincreaseproductionandexports,butthedistortionsand?scalcoststheygenerateleadtorealincomelossesgloballyandforsubsidizingcountries,especiallyChina.TheassumedeconomicintegrationscenariobooststhewelfareofliberalizingcountriesasthemarketlostintheUScanbecom-pensated(and,insomecases,morethancompensated)byincreasingaccesstoothermarkets.Overall,worldrealGDPincreasesby0.3percent,morethano?settingthewelfarelossfromtheUStari?increases.Importantly,thesimulationssuggestthatonlypolicymixesthatincludeeconomicintegrationemergeasincreasingworldwelfareeveninthepresenceofUStari?s.

Whiletheseresultsarespeci?ctotheassumedpolicyscenarios,theyconvey

broaderinsightsonthee?ectsofdi?erentpolicyresponsesbytradingpartnerstohighertari?sintheUS.Retaliatorytari?sdonotproduceglobalwelfaregains.Althoughtheymayo?settheterms-of-tradee?ectsoftheinitialUStari?s,theyalsointroducecostlydistortionsandcanprovokefurthertari?increases,leadingtoadetrimentaltari?es-calation.Industrialpolicymeasuressuchasproductionsubsidiesareine?cienttoolsforaddressingtheexternalitiesresultingfromtari?s;infact,theymayworsentheterms-of-tradee?ectoftari?sbyloweringtheworldpriceofsubsidizedgoodsandmaytriggercountermeasures,oftenintheformofincreasedimporttari?stargetingthesubsidizers.

4

Deepereconomicintegrationcanhelpreducedistortionsandcreatenewmarketopportunities.Whileregionaltradeagreementsmayleadtonegativetradediversione?ects(whichtendtobeminorforrecentdeeptradeagreementsandwithglobalinput-outputlinkages(

Mattooetal.

,

2022

)),our?ndingssuggestthatthegainsfromeconomicintegrationbetweentwocountriesbecomeincreasinglysigni?cantwhentheintegratingeconomiesaretargetedbythetari?sofalargetradingpartner—are-sultconsistentwiththelogicdiscussedin

Baldwin

(

2025

).Inthesimulations,we?ndthattherealincomeofcountriesthatdeepenintegrationincreasesmorerelativetoasituationwithUStari?sthanrelativetoabaselinewithouttari?increases.

Thispaperconnectstothevastliteratureontheevaluationoftradepolicies,withafocusonoptimalpolicies.Alongtraditionoftheoreticalworkhasstudiedthecharacteristicsofunilaterallyoptimal,retaliatory(Nash)andcooperativeimporttari?sinbothneoclassical(

Johnson

,

1953

;

BagwellandStaiger

,

1999

;

Costinotetal.

,

2015

)andimperfectlycompetitiveframeworks(

Gros

,

1987

;

DemidovaandRodríguez-

Clare

,

2009

).Whiletari?screatewelfarelossesbyintroducingdistortions,theycanalsoproducebene?cialterms-of-traderesponses.Inmodelswithincreasingreturnstoscale,additionalpro?tshifting(

Ossa

,

2014

)orproductionrelocation(

Venables

,

1987

)e?ectscanarise,andwithheterogeneous?rmsand?xedmarketentrycosts,otheradjustmentsthroughtheentryandexitof?rmsselectionfurthera?ectwelfare(

Caliendoetal.

,

2023

).Potentialbene?tsfromterms-of-trademanipulationhoweverdisappearinthepresenceofoptimal(Nash)retaliatorytari?s.

5

ThispaperiscloselyrelatedtorecentandongoingworkusinggeneralequilibriummodelstoassesstheeconomicimplicationsoftheproposedandobservedUStari?sandretaliationbytradingpartnersin2025(

Rodríguez-Clareetal.

,

2025

;

Alessandria

etal.

,

2025

;

BaqaeeandMalmberg

,

2025

;

Ignatenkoetal.

,

2025

;

WTO

,

2025

;

Auray

etal.

,

2025

;

Conteducaetal.

,

2025

).In

IMF

(

2025

,Box1.2),weemployaslightlydi?erentquantitativetrademodeltoassesstheexportandrealGDPimpactofUStari?sandcountermeasuresintroduceduntilApril4,andcomparethe?ndingswithanalternativetrademodelandaglobalmacromodel.Wecontributetothisbodyof

4Thejusti?cationforsubsidiesasapolicytooltocorrectmarketfailuressuchasproductionexternalitiesandeconomiesofscaleremainsvalidregardlessofthepresenceoftari?sbyatradingpartner.

5Afewrecentpapers(seethereviewby

Ossa

(

2016

))haveusedquantitativetrademodelstoidentifytheunilaterallyoptimal,Nashandcooperativetari?s.

workbycomparingthee?ectsofdi?erenttradepolicyinstruments–tari?s,subsidiesandchangesinnon-tari?barriers–thatUStradepartnerscanadoptinresponsetothetari?s.

Theoreticalworkhasanalyzedtheuseandimplicationsofdomesticsubsidiestoaddresstermsoftradeexternalitiesproducedbytari?s(

Lee

,

2016

).Empiricallyhow-ever,therehasbeenlittlee?orttoquantifythee?ectsofsubsidiesinthepresenceoforasaresponsetoimporttari?s.Notableexceptionsare

Bartelmeetal.

(

2024

)and

LashkaripourandLugovskyy

(

2023

),whoassessthewelfareconsequencesofunilater-allyoptimalsubsidiesandtari?s,and

Juetal.

(

2024

),whostudythee?ectsofChina’ssubsidiesandtheUS-Chinatari?sduring2018-19.

6

Thesepapersusedi?erentquanti-tativetrademodelswithproductionexternalitiestointroduceane?ciencymotivationtosubsidies.Weomitexternaleconomiesofscale,sincethefocusofouranalysisistoidentifytheroleofsubsidiesasaresponsetotari?s–theuseofindustrialpoliciestocorrectmarketfailuressuchasexternalitiescanbejusti?edregardlessofthetari?s.

OurresultshighlightthepotentialforeconomicintegrationthroughnewanddeepPreferentialTradeAgreement(PTAs)too?setlossesinmarketaccessandwelfarefromUStari?s.Whilenumerouspapershavefoundpositivewelfaree?ectsofPTAsbothonmembercountriesand,toalesserextent,onthirdcountries(e.g.

Mattooetal.

(

2022

),

Leeetal.

(

2023

),and

Fontagnéetal.

(

2023

)),theimplicationsofdeepereconomicintegrationhavenotbeenassessedinthepresenceofrisingtari?sbycountriesoutsidethePTAs,andincomparisonwithotherpolicyresponses.

7

OurresultthatregionalintegrationincreaseswelfareinthepresenceofUStari?s,maysupporttheintuitiveargumentthatthevalueofregionalintegrationincreaseswiththeleveloftari?sandtheeconomicsizeoftheexcludedcountries.

Therestofthepaperisorganizedasfollows.Section

2

brie?ypresentsthequanti-tativetrademodelandthedata,anddiscussesthepolicyscenarios.Section

3

describesthequantitativeresultsontradeandrealGDPforeachofthesimulatedscenarios.Sec-tion

4

concludesbyhighlightingtheimplicationsofouranalysisandidentifyingareasforfuturework.

6

Hodgeetal.

(

2024

)assessthee?ciencye?ectsofdi?erentsectoralindustrialpoliciesandsubsidiesintheEU.

7Theliteraturehasinvestigatedboththeoreticallyandempiricallythee?ectofpreferentialliber-alizationonthelevelofexternaltari?sbymembercountriesandbyoutsiders(

Estevadeordaletal.

(

2008

);

Ornelas

(

2005

);

BaldwinandRobert-Nicoud

(

2015

)andthereviewsby

FreundandOrnelas

(

2010

)and

Maggi

(

2014

)),butnothowtheroleoftradeagreementsvarieswithtari?simposedbythirdcountries.

Baldwin

(

2025

)argueshowthereductioninaccesstoalargemarketliketheUSonecanpromptdomesticinterestgroupsintradingpartnerstolobbyforPTAswithothereconomiestomakeupfortari?-inducedexportlosses.

Model,dataandpolicycounterfactuals

Quantitativemodelanddataconstruction

Themodelisfrom

CaliendoandParro

(

2015

),extendedtohavingproductionsubsidies(

Rotunnoetal.

(

2025

),whichisthemodelby

Juetal.

(

2024

)butwithoutexternaleconomiesofscale).Inthismodel,?rmsproduceoutpututilizingasinglefactorofproductionandtradedintermediateinputsunderconditionsofconstantreturnstoscaleandperfectcompetition.Theoutputfrom?rmscanbedirectedtoward?naldemandorusedasintermediateinputsbyother?rmsthroughroundaboutproduction.Netgovernmentrevenues,de?nedasthedi?erencebetweentari?revenuesandsub-sidyexpenditures,arerebatedlumpsumtoconsumers.Importantly,aggregatetradede?citsareheld?xedinthemodel,whilesectoralandbilateralnetexportsadjustendogenously.

Inthistypeofcomparativeadvantagemodels,changesinbilateraltradecosts(resultingfromchangesintari?sandnon-tari?measures)in?uencetradeandwelfarebya?ectingrelativeprices,leadingtotwoopposingadjustments.First,importtari?screateawedgebetweendomesticandinternationalprices,thusdistortingconsump-tionandproduction,potentiallyshiftingspecializationpatternsawayfromcountries’comparativeadvantages.Intheabsenceofotherdistortions,asassumedinthismodel,thise?ectlowerswelfare.Second,importtari?simposedbyacountrythathasmarketpowerinthetargetedproducts(i.e.largecountryhypothesis)reducestheworldpriceofimportsrelativetoexportsoftheimposingcountry.Thisterms-of-tradee?ectin-creasesthewelfareofthelargecountryimposingthetari?sattheexpensesofitstradepartners.

8

Thesimulationsderivedfromthisstandardquantitativetrademodelcanbeunder-stoodasprovidinglong-runstatice?ectsofchangesinpoliciesandtradecostsresultingfromthereallocationofresourcesacrosssectors.Consequently,thesimulatedtradeandwelfaree?ectsarelikelytounderestimatetheactualimpactsofpolicychanges.Theperfectlycompetitiveframeworkofthemodeldoesnotaccountforadditionalstatice?ectsoftari?sandotherpoliciesonmarketsizeandsectoralproductivity,whichcanbecapturedinMelitz-stylemodels(

Caliendoetal.

,

2023

).Additionally,themodelassumesthattheprimaryfactorofproductioncanmovefreelyacrosssectors,therebyexcludingadjustmentfrictions(

AhnandTan

,

2025

).Asastaticmodel,itcannotcapturethelikelynegativee?ectsofhighertari?songrowthandproductivityduetoreducedinvestment(

Andersonetal.

,

2020

).Finally,themodelemphasizeschangesinpolicylevelswhileneglectingthepotentiallysigni?cantchannelofpolicyuncertainty(

HandleyandLim?o

,

2022

).

8Whilethemodeldoesnotincorporatenominalexchangerates,adjustmentsinrelativewagesandproducerpricescanbeinterpretedasmimickingtheexpectedexchangerateresponses–e.g.,followinganincreaseinimporttari?s,thecountry’swageincreasesandtheexchangerateappreciates.

Bysolvingthemodelinchanges(

Dekleetal.

,

2007

),thedatarequirementsforthecounterfactualanalysisareminimal.Thecalibratedversionofthemodelencompasses73countriesandarest-of-the-worldaggregate,alongwith20sectors(19goodssectorsandoneservicesectoraggregate).Dataonbilateraltrade,expenditure,valueadded,andinput-outputsharesareobtainedfromtheOECDTiVAinter-countryinput-output(ICIO)tables,withthemostrecentyearavailable,2020,usedformodelcalibrationatthebaseline.Bilateralappliedtari?sattheproductlevelaresourcedfromtheITCMacMapdatabasefor2022,supplementedbyTRAINSformissingcountriesanddatafrom

Bown

(

2021

)forUS-Chinatari?sasof2020.Thesetari?sareaggregatedatthesectorleveloftheICIOtablesusingimport-weightedaverages.

9

Estimatesofsubsidyratesperdollarofoutputbycountryandsectoraredrawnfrom

Rotunnoetal.

(

2025

).

Theonlyparametersthatneedtobecalibratedinthemodelarethetradeelas-ticities,whichgovernthedirecte?ectsoftradecostsonbilateraltrade?ows.Weobtaintheirvaluesfrom

Girietal.

(

2021

),whoestimateelasticitiesforthesameman-ufacturingsectorsinourdatasetusingmicropricedataandthesimulatedmethodofmomentsapproachdevelopedby

SimonovskaandWaugh

(

2014

).Tradeelasticitiesforprimarysectorsaresourcedfrom

Fontagnéetal.

(

2022

).Acrossthe19goodssec-tors,theelasticityvaluesrangefrom3to8.9(withhighervaluesinprimarysectors),andtheaverag