Tariffs and Politics: Evidence from Trump's Trade Wars

74 Pages Posted: 6 Nov 2019

See all articles by Thiemo Fetzer

Thiemo Fetzer

University of Warwick

Carlo Schwarz

Bocconi University - Department of Economics

Date Written: October 18, 2019

Abstract

Are retaliatiory tariffs politically targeted and, if so, are they effective? Do countries designing a retaliation response face a trade-off between maximizing political targeting and mitigating domestic economic harm? We use the recent trade escalation between the US, China, the European Union (EU) and the North American Free Trade Agreement (NAFTA) countries to answer these questions. We find substantial evidence that retaliation was directly targeted to areas that swung to Donald Trump in 2016 (but not to other Republican candidates running for office in the same year). We further assess whether retaliation was optimally chosen using a novel simulation approach constructing counterfactual retaliation responses. For China and particularly, for Mexico and Canada, the chosen retaliation appears suboptimal: there exist alternative retaliation bundles that would have produced a higher degree of political targeting, while posing a lower risk to damage the own economy. We further present evidence that retaliation produces economic shocks: US exports on goods subject to retaliation declined by up to USD 15.28 billion in 2018 and export prices have dropped significantly. Lastly, we find some evidence suggesting that retaliation is effective: in areas exposed to retaliation Republican candidates fared worse in the 2018 Midterm elections, and similarly Presidential approval ratings, especially among Democrats, have declined.

Keywords: trade war, tariff, targeting, political economy, elections, populism

JEL Classification: F130, F140, F160, F550, D720

Suggested Citation

Fetzer, Thiemo and Schwarz, Carlo, Tariffs and Politics: Evidence from Trump's Trade Wars (October 18, 2019). CESifo Working Paper No. 7553, Available at SSRN: https://ssrn.com/abstract=3357130

Thiemo Fetzer (Contact Author)

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Carlo Schwarz

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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