## wpiea2025147 ## Source details **Canonical URL:** [wpiea2025147](https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025147.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2025/english/wpiea2025147.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2025/english/wpiea2025147.pdf.json) --- ### Model structure and mechanics - Model basis: Caliendo and Parro (2015), extended to include production subsidies (Rotunno et al.(2025); model by Ju et al.(2024) without external economies of scale). - Production and markets: - Firms use a single factor of production and traded intermediate inputs under constant returns to scale and perfect competition. - Firm output can be used for final demand or as intermediate inputs in roundabout production. - Government treatment: - Net government revenues (tariff revenues minus subsidy expenditures) are rebated lump sum to consumers. - External constraints: - Aggregate trade deficits are held fixed; sectoral and bilateral net exports adjust endogenously. - Price and welfare channels: - Tariffs create a domestic-international price wedge, distorting consumption and production and, absent other distortions, lowering welfare. - Large-country terms-of-trade effects: tariffs by a country with market power can reduce world import prices and raise the imposing country’s welfare at the expense of partners. - Solution approach: - The model is solved in changes (Dekle et al.,2007), minimizing data requirements for counterfactual analysis. - Interpretation: - Simulations provide long-run static effects from reallocation of resources across sectors. ### Calibration, data sources, and elasticities - Coverage and baseline: - 73 countries plus a rest-of-the-world aggregate. - 20 sectors: 19 goods sectors and one service sector aggregate. - Model calibrated to 2020 (most recent year in OECD TiVA inter-country input-output (ICIO) tables). - Data inputs: - Bilateral trade, expenditure, value added, input-output shares from OECD TiVA ICIO (2020). - Tariff and import value data: - Bilateral applied tariffs at product level from ITC MacMap database for 2022; supplemented by TRAINS for missing countries and Bown (2021) for US-China tariffs as of 2020. - Product-level tariffs aggregated to ICIO sector level using import-weighted averages. - For changes in US tariff, product-level import values from USITC for 2024 are used; for other countries and baseline aggregation, import values for 2023 from the BACI CEPII database are used. - Subsidy data: - Estimates of subsidy rates per dollar of output by country and sector from Rotunno et al.(2025) used to compute baseline and counterfactual subsidy expenditure. - Trade elasticities: - Only calibrated parameters are trade elasticities. - Manufacturing sector elasticities from Giri et al.(2021); primary sector elasticities from Fontagné et al.(2022). - Across the 19 goods sectors, elasticity values range from 3 to 8.9, with an average of 4.6. - The aggregate service sector is assigned the average elasticity value of 4.6. ### Subsidy calibration and baseline rates - Formula for total subsidy expenditure per country: - S_i = Σ_j s^j_i y^j_i, where s^j_i is the subsidy rate and y^j_i is total output by country i and sector j. - Baseline subsidy rates (share of gross output): - China and the US at around 0.7 percent. - Other large economies (EU, Russia, the UK, Canada) have subsidy rates between 0.2 and 0.5 percent. - Baseline subsidy shares in goods value added: - China ≈ 2.6 percent. - US ≈ 1.6 percent. - Service aggregate: - Subsidy rates for the service aggregate sector are set to zero at baseline and in counterfactuals. ### Counterfactual industrial policy (subsidy reallocation) rule - Reallocation rule for sectors negatively affected by US tariffs: - s'^j_i = (dx^j_i,US / Σ_{j ∈ Ω_i} dx^j_i,US) × (S_i / y^j_i) - dx^j_i,US denotes simulated drop in country i and sector j exports to the US; Ω_i is the set of sectors whose exports to the US decline. - Sectors with increased exports to the US receive counterfactual subsidy rate = zero. - Illustrative sectoral changes (China and EU examples): - China: “other manufacturing” sector subsidy rate increases by 3.8 percentage points; it accounts for 12 percent of the reduction in China’s goods exports to the US and has a low baseline subsidy rate (0.5 percent). - China: electronics and electrical equipment receive smaller subsidy increases due to higher initial subsidy rates (1.1 and 1.2 percent respectively). - China: autos and chemicals account for 4 and 3 percent of China’s losses to the US respectively and receive less additional subsidy. - EU: largest subsidy increase in transport equipment sector is 0.6 percentage points; chemicals receive zero subsidies in the counterfactual (down from 0.2 percent at baseline). ### Main trade-effect findings and quantitative projections - US tariffs (April 2 scenario) — direct effects: - US goods imports decline: 32 percent. - US domestic sales increase: 15 percent. - Domestic share of total US expenditure on goods rises from 77 percent to 85 percent. - Imports decline particularly in plastic and electronics; metals and mineral products also decline where trade elasticity and domestic production are high; oil and chemicals change little. - Geographic export impacts: - China’s real exports to the US decline: 70 percent (April 2 scenario). - Average drop for other major trading partners: 35 percent. - Mexico total exports reduction: approximately 13 percent. - Canada total exports reduction: approximately 19 percent. - Some countries (e.g., Argentina, Russia, Turkiye) with relatively low hikes in US tariffs increase their real exports to the US. - Alternate US tariff targeting (April 11 scenario): - China’s goods real exports to non-US markets increase by 6.4 percent. - China’s exports to the US fall by 88 percent. - Total value of US goods imports declines by 27 percent (April 11) compared to 32 percent (April 2). - Retaliation (tit-for-tat): - Tit-for-tat retaliation reduces US exports by up to 49 percent. - World real income: from -0.16 to -0.2 percent when adding retaliation. - Retaliation does not increase exports for other countries; Mexico and Canada exports decline further as production reorients to domestic markets. - Industrial policy / subsidies by trading partners: - Subsidies reduce consumer prices of subsidized goods and can boost output and exports, but in the simulated industrial policy scenario subsidies are ineffective at fully offsetting the drop in exports to the US caused by the tariffs because (1) subsidies are not destination-targeted and (2) the estimated level of support is small relative to US tariff hikes. - China’s total exports reduction is attenuated under the subsidies scenario from 10 to 8 percent. - China’s exports to non-US destinations increase between 8 and 13 percent (selected markets, e.g., EU, Canada, UK). - China sectoral export increases in values under subsidies: - Other manufacturing: 24 billions $ - Electronics: 27 billions $ - Textile and apparel: 18 billions $ - China wages and producer prices change under subsidies: -1.7 percent (vs -1.5 percent with US tariffs only). - China real income decline under subsidies: 0.4 percent. - The simulated increases in China’s goods exports to the EU, Canada, Mexico and the UK under the subsidies scenario are roughly equivalent to between 1 and 2 percent of those economies GDPs in goods in 2020. - Subsidy-led diversion could prompt countermeasures such as countervailing duties (not modeled). - Economic integration responses: - New and deeper trade agreements increase exports of liberalizing countries; some large RCEP members, including Japan and Korea, experience increases in real exports of up to 15 percent, outweighing export losses from US tariffs. - Deepening of EU integration leads to a 10 percent boost in intra-EU trade. - Welfare gains from economic integration for some countries: between 0.5 and 1.2 percent. - World real GDP increases by 0.3 percent when trade partners deepen economic integration in response to US tariffs. - Canada and Mexico see marginally reduced export drops under new PTAs but only partial substitution for lost US market access. - Countries not in the new PTA network (e.g., Colombia, Israel, Russia, Saudi Arabia, Switzerland, Turkiye) generally experience a further slight decline due to trade diversion. ### Key numeric statistics (preserved) - Countries/sectors: 73 countries + rest-of-world; 20 sectors (19 goods + 1 service). - Calibration year: 2020 (ICIO tables). - Tariff data years: ITC MacMap for 2022; US-China tariffs data as of 2020 from Bown (2021); US product-level import values for changes from USITC for 2024; BACI CEPII import values for 2023 for other countries. - Trade elasticities across 19 goods sectors: range 3 to 8.9; average 4.6 (service sector assigned 4.6). - Baseline subsidy rates: China and US ≈ 0.7 percent (share of gross output); other large economies 0.2–0.5 percent. - Goods value added subsidy shares: China ≈ 2.6 percent; US ≈ 1.6 percent. - Main outcome figures restated: - US goods imports decline: 32 percent (April 2 scenario). - US domestic sales increase: 15 percent. - Domestic share of US expenditure on goods: from 77 percent to 85 percent. - China’s real exports to the US decline: 70 percent (April 2); 88 percent (April 11). - Average drop for other major trading partners: 35 percent. - Mexico total exports reduction: approximately 13 percent. - Canada total exports reduction: approximately 19 percent. - China exports to non-US markets increase: 4 percent (April 2); 6.4 percent (April 11). - Total value of US goods imports decline: 27 percent (April 11) vs 32 percent (April 2). - US exports reduction under retaliation: up to 49 percent. - World real income: from -0.16 to -0.2 percent when adding retaliation. - China total exports reduction under subsidies: from 10 to 8 percent. - China exports to non-US destinations increase between 8 and 13 percent (selected markets). - China sectoral export increases in values under subsidies: - Other manufacturing: 24 billions $ - Electronics: 27 billions $ - Textile and apparel: 18 billions $ - China wages and producer prices change under subsidies: -1.7 percent (vs -1.5 percent with US tariffs only). - China real income decline under subsidies: 0.4 percent. - Welfare gains from economic integration for some countries: between 0.5 and 1.2 percent. - World real GDP increases by 0.3 percent when trade partners deepen economic integration in response to US tariffs. ### Limitations, omitted channels, and interpretation caveats - Model limitations: - Perfect competition framework excludes static effects of tariffs on market size and sectoral productivity (Melitz-style firm heterogeneity not captured). - Assumes free movement of the primary factor across sectors, excluding adjustment frictions. - Static specification cannot capture dynamic effects of tariffs on growth and productivity via investment responses. - Policy uncertainty channel is neglected. - Model does not incorporate nominal exchange rates explicitly; adjustments in relative wages and producer prices can be interpreted as mimicking expected exchange rate responses. - Implication for interpretation: - Simulations provide long-run static reallocation effects; actual dynamic and firm-level responses could amplify or change the magnitude and distribution of outcomes reported. *Source: wpiea2025147 - 2.1 Quantitative model and data construction; 3.1 Trade effects (PDF).* ### 2.1 Quantitative model and data construction ### 2.1 Quantitative model and data construction ### Model structure and mechanics - Model basis: Caliendo and Parro (2015), extended to include production subsidies (Rotunno et al.(2025); model by Ju et al.(2024) without external economies of scale). - Production and markets: - Firms use a single factor of production and traded intermediate inputs under constant returns to scale and perfect competition. - Firm output can be used for final demand or as intermediate inputs in roundabout production. - Government treatment: - Net government revenues (tariff revenues minus subsidy expenditures) are rebated lump sum to consumers. - External constraints: - Aggregate trade deficits are held fixed; sectoral and bilateral net exports adjust endogenously. - Price and welfare channels: - Tariffs create a domestic-international price wedge, distorting consumption and production and, absent other distortions, lowering welfare. - Large-country terms-of-trade effects: tariffs by a country with market power can reduce world import prices and raise the imposing country’s welfare at the expense of partners. ### Interpretation and model scope (limitations) - Simulations provide long-run static effects from reallocation of resources across sectors. - Potential underestimation of actual impacts because: - Perfect competition framework excludes static effects of tariffs on market size and sectoral productivity; Melitz-style models capture these (Caliendo et al.,2023). - Model assumes free movement of the primary factor across sectors, excluding adjustment frictions (Ahn and Tan,2025). - Static specification cannot capture negative effects of higher tariffs on growth and productivity via reduced investment (Anderson et al.,2020). - Policy uncertainty channel is neglected (Handley and Limão,2022). - Exchange rates: - Model does not incorporate nominal exchange rates, but adjustments in relative wages and producer prices can be interpreted as mimicking expected exchange rate responses (e.g., wage increases and exchange rate appreciation following an increase in import tariffs). ### Solution approach - The model is solved in changes (Dekle et al.,2007), minimizing data requirements for counterfactual analysis. ### Calibration and data sources - Coverage: - 73 countries plus a rest-of-the-world aggregate. - 20 sectors: 19 goods sectors and one service sector aggregate. - Baseline year and data inputs: - Model calibrated to 2020 (most recent year in OECD TiVA inter-country input-output (ICIO) tables). - Data: bilateral trade, expenditure, value added, input-output shares from OECD TiVA ICIO (2020). - Tariffs and trade policy inputs: - Bilateral applied tariffs at product level from ITC MacMap database for 2022, supplemented by TRAINS for missing countries and data from Bown (2021) for US-China tariffs as of 2020. - Product-level tariffs aggregated to ICIO sector level using import-weighted averages. - For changes in US tariff, product-level import values from USITC for 2024 are used; for other countries and baseline aggregation, import values for 2023 from the BACI CEPII database are used. - Subsidies: - Estimates of subsidy rates per dollar of output by country and sector from Rotunno et al.(2025) used to compute baseline and counterfactual subsidy expenditure. - Trade elasticities: - The only calibrated parameters are trade elasticities. - Values obtained from Giri et al.(2021) for manufacturing sectors (estimated using micro price data and the simulated method of moments of Simonovska and Waugh(2014)). - Trade elasticities for primary sectors from Fontagné et al.(2022). - Across the 19 goods sectors, elasticity values range from 3 to 8.9, with an average of 4.6. - The aggregate service sector is assigned the average elasticity value of 4.6 (noting meta-analysis value of 4.5 in Head and Mayer (2014)). ### Subsidy calibration details - Total subsidy expenditure per country: S_i = Σ_j s^j_i y^j_i, where s^j_i is the subsidy rate and y^j_i is total output by country i and sector j. - Baseline subsidy rates: - Largest subsidy rates as a share of gross output: China and the US at around 0.7 percent. - Other large economies (EU, Russia, the UK, Canada) have subsidy rates between 0.2 and 0.5 percent. - In terms of goods value added: China ≈ 2.6 percent, US ≈ 1.6 percent. - Subsidy rates for the service aggregate sector are set to zero at baseline and in counterfactuals. ### Counterfactual subsidy reallocation rule (industrial policy scenario) - Counterfactual subsidies s'^j_i for sectors negatively affected by US tariffs are proportional to the sector’s share in the total decline in the country’s goods exports to the US under the US tariff only scenario: - s'^j_i = (dx^j_i,US / Σ_{j ∈ Ω_i} dx^j_i,US) × (S_i / y^j_i) - dx^j_i,US denotes simulated drop in country i and sector j exports to the US; Ω_i is set of sectors whose exports to the US decline. - For sectors with increased exports to the US, counterfactual subsidy rate is assumed to be zero. - Illustrative numbers: - China: “other manufacturing” sector subsidy rate increases by 3.8 percentage points; it accounts for 12 percent of the reduction in China’s goods exports to the US and has a low baseline subsidy rate (0.5 percent). - Electronics and electrical equipment in China receive smaller subsidy increases due to higher initial subsidy rates (1.1 and 1.2 percent respectively). - Autos and chemicals account for 4 and 3 percent of China’s losses to the US respectively and receive less additional subsidy. - EU: largest subsidy increase in transport equipment sector is 0.6 percentage points; chemicals receive zero subsidies in the counterfactual (down from 0.2 percent at baseline). ### Key numerical calibration and elasticity facts (preserved) - Countries/sectors: 73 countries + rest-of-world; 20 sectors (19 goods + 1 service). - Calibration year: 2020 (ICIO tables). - Tariff data years: ITC MacMap for 2022; US-China tariffs data as of 2020 from Bown (2021); US product-level import values for changes from USITC for 2024; BACI CEPII import values for 2023 for other countries. - Trade elasticities across 19 goods sectors: range 3 to 8.9; average 4.6 (service sector assigned 4.6). - Baseline subsidy rates: China and US ≈ 0.7 percent (share of gross output); other large economies 0.2–0.5 percent. - Goods value added subsidy shares: China ≈ 2.6 percent; US ≈ 1.6 percent. ### Relationship to other models and omitted channels - Does not capture firm-level extensive margins or productivity effects captured by Melitz-style models. - Ignores adjustment frictions from limited factor mobility across sectors. - Static nature prevents capturing dynamic growth and productivity impacts from investment responses. - Does not model policy uncertainty channel explicitly. *Source: wpiea2025147 - 2.1 Quantitative model and data construction (PDF).* ### 3.1 Trade effects ### 3.1 Trade effects ### US tariffs: direct trade impacts - US goods imports are projected to decline by 32 percent under the April 2 US tariff scenario. - Imports decline particularly in sectors with high tariff increases (plastic and electronics) and in sectors with high trade elasticity and significant domestic production (metals and mineral products). - Imports in some large sectors with relatively low tariff hikes such as oil and chemicals change little. - Domestic sales in the US are simulated to increase by 15 percent, substituting for the drop in imports. - The domestic share of total US expenditure on goods rises from 77 percent to 85 percent. ### Geographic and partner-specific export effects - China’s real exports to the US are projected to decline by 70 percent under the April 2 scenario. - The average drop for other major trading partners is 35 percent, with more pronounced effects for other East Asian economies like Vietnam and Thailand. - Mexico and Canada are expected to experience reductions of approximately 13 and 19 percent in total exports, respectively. - A few countries including Argentina, Russia and Turkiye facing relatively low hikes in US tariffs increase their real exports to the US. ### China’s export diversion and alternative tariff scenarios - Under the April 2 scenario, China’s goods exports to its largest 20 non-US destinations increase by 4 percent overall, with larger increases to markets facing modest US tariffs such as EU, UK, Mexico and Canada; exports to some East Asian economies (e.g., Vietnam and Thailand) increase modestly or decrease. - Under a hypothetical April 11 scenario (high tariffs targeted on China where the effective rate on China rises to 115 percent and those on other countries are decreased): - China’s goods real exports to non-US markets increase by 6.4 percent. - China’s exports to the US fall by 88 percent. - The total value of US goods imports declines by 27 percent under the April 11 tariffs, compared to a 32 percent decrease under the April 2 scenario. ### Retaliatory tariffs (tit-for-tat) - Tit-for-tat retaliation reduces US exports by up to 49 percent due to higher tariffs imposed in all markets. - Retaliation does not increase exports for other countries; exports from Mexico and Canada decline further as production is reoriented toward domestic markets. - As part of the substitution effect, some countries increase their imports from China. ### Industrial policy / subsidies by trading partners - In the model, subsidies reduce consumer prices of subsidized goods and can boost both output and exports of the subsidizing countries, but subsidies in the simulated “industrial policy” scenario are ineffective at offsetting the drop in exports to the US caused by the tariffs. - Two mechanisms explain this: (1) subsidies are not destination-targeted; (2) the estimated level of support is small relative to US tariff hikes. - China’s total exports reduction is attenuated under the subsidies scenario from 10 to 8 percent; export losses for other countries are roughly unchanged. - Under the subsidies scenario, China’s exports to non-US destinations increase especially to EU, Canada and the UK, with increases between 8 and 13 percent. - Sectoral value increases for China’s exports to non-US markets under subsidies: - Other manufacturing: 24 billions $ - Electronics: 27 billions $ - Textile and apparel: 18 billions $ - The simulated increases in China’s goods exports to the EU, Canada, Mexico and the UK under the subsidies scenario are roughly equivalent to between 1 and 2 percent of those economies GDPs in goods in 2020. - The subsidy-led diversion of China’s exports could lead importing countries to enact countermeasures such as countervailing duties (not modeled here). ### Economic integration (new and deeper trade agreements) - New and deeper trade agreements increase exports of liberalizing countries: - Some large RCEP members, including Japan and Korea, experience increases in real exports of up to 15 percent, outweighing export losses from US tariffs. - Deepening of EU integration leads to a 10 percent boost in intra-EU trade. - EU external agreements with some CPTPP members, Mercosur, India and Indonesia can outweigh export losses to non-EU destinations caused by US tariffs. - Drops in exports from Canada and Mexico are marginally reduced by participation in new agreements (e.g., CPTPP enlargement, Canada-India, Canada-Indonesia, Canada-Mercosur), but these can substitute only partially for lost US market access. - Exports from countries not involved in the new PTA network (e.g., Colombia, Israel, Russia, Saudi Arabia, Switzerland, Turkiye) generally experience a further slight decline due to trade diversion. ### Summary of trade findings - US unilateral tariffs as of April 2 significantly reduce US trade and redirect exports toward non-US markets. - The size and geography of export diversion depend crucially on the relative targeting of US tariffs across countries (e.g., larger, China-targeted tariffs produce larger displacement of US imports from China). - Retaliation and subsidies alter trade flows but can generate additional distortions and escalation risks; economic integration provides a channel to offset trade diversion and restore market opportunities for liberalizing countries. ### Key numeric statistics (preserved exactly as in the source) - US goods imports decline: 32 percent (April 2 scenario) - US domestic sales increase: 15 percent - Domestic share of US expenditure on goods: from 77 percent to 85 percent - China’s real exports to the US decline: 70 percent (April 2); 88 percent (April 11) - Average drop for other major trading partners: 35 percent - Mexico total exports reduction: approximately 13 percent - Canada total exports reduction: approximately 19 percent - China exports to non-US markets increase: 4 percent (April 2); 6.4 percent (April 11) - Total value of US goods imports decline: 27 percent (April 11) vs 32 percent (April 2) - US exports reduction under retaliation: up to 49 percent - World real income: from -0.16 to -0.2 percent when adding retaliation - China total exports reduction under subsidies: from 10 to 8 percent - China exports to non-US destinations increase between 8 and 13 percent (selected markets) - China sectoral export increases in values under subsidies: - Other manufacturing: 24 billions $ - Electronics: 27 billions $ - Textile and apparel: 18 billions $ - China wages and producer prices change under subsidies: -1.7 percent (vs -1.5 percent with US tariffs only) - China real income decline under subsidies: 0.4 percent - Welfare gains from economic integration for some countries: between 0.5 and 1.2 percent - World real GDP increases by 0.3 percent when trade partners deepen economic integration in response to US tariffs *Source: wpiea2025147 - 3.1 Trade effects (IMF working paper content).* ### References ### References ### Cited works - Adilbish, O., D. Cerdeiro, R. Duval, G. H. Hong, L. Mazzone, L. Rotunno, H. Toprak, and M. Vaziri (2025). Europe’s productivity weakness. Technical report, IMF Working Paper. - Ahn, J. and B. J. Tan (2025). Supply chain diversification and resilience. Technical report, IMF Working Paper. - Alessandria, G. A., J. Ding, S. Y. Khan, and C. B. Mix (2025). The tariff tax cut: Tariffs as revenue. Working Paper 33784, National Bureau of Economic Research. - AlJazeera (2025a, April). China pledges support for economy, dismisses US claims on tariff talks.AlJazeera. - AlJazeera (2025b, April). Japan introduces urgent economic measures to ease pain from US tariffs.AlJazeera. - Anderson, J. E., M. Larch, and Y. V. Yotov (2020). Transitional growth and trade with frictions: A structural estimation framework.The Economic Journal 130(630), 1583–1607. - Auray, S., M. B. Devereux, and A. Eyquem (2025). Tariffs and Retaliation: A Brief Macroeconomic Analysis. Technical report, National Bureau of Economic Research. - Baba, C., T. Lan, M. A. Mineshima, F. Misch, M. Pinat, A. Shahmoradi, J. Yao, and M. R. van Elkan (2023).Geoeconomic Fragmentation: Whats at Stake for the EU. - Bagwell, K. and R. W. Staiger (1999). An economic theory of gatt.American Economic Review 89(1), 215–248. - Baldwin, R. (2025).The Great Trade Hack: How Trump’s Trade War Fails and the World Moves on. CEPR. - Baldwin, R. and F. Robert-Nicoud (2015). A simple model of the juggernaut effect of trade liberalisation.International Economics 143, 70–79. - Baqaee, D. and H. Malmberg (2025). Long-Run Effects of Trade Wars. Technical report, National Bureau of Economic Research. - Bartelme, D. G., A. Costinot, D. Donaldson, and A. Rodriguez-Clare (2024). The textbook case for industrial policy: Theory meets data.Journal of Political Economy. Forthcoming. - Bloomberg (2025, April).South Korea unveils2BillioninAidf orT arif f−HitAutoSector. Bloomberg. - Bouët, A., L. M. Sall, and Y. Zheng (2024). Trump 2.0 tariffs: What cost for the world economy.Policy Brief 49. - Bown, C. P. (2021). The us–china trade war and phase one agreement.Journal of Policy Modeling 43(4), 805–843. - Caliendo, L., R. C. Feenstra, J. Romalis, and A. M. Taylor (2023). Tariff reductions, heterogeneous firms, and welfare: Theory and evidence for 1990–2010.IMF Economic Review 71(4), 817–851. - Caliendo, L. and F. Parro (2015). Estimates of the trade and welfare effects of nafta. The Review of Economic Studies 82(1), 1–44. - Choi, S.-H. and Y. Nohara (2025, March). China, Japan, South Korea to Meet as Trump Tariffs Take Shape.Bloomberg. - Clausing, K. A. and M. E. Lovely (2024). Why trump’s tariff proposals would harm working americans.Peterson Institute for International Economics Policy Brief, 24–1. - Conteduca, F. P., M. Mancini, and A. Borin (2025). Roaring tariffs: The global impact of the 2025 US trade war. Technical report, VoxEU.org. - Costinot, A., D. Donaldson, J. Vogel, and I. Werning (2015). Comparative advantage and optimal trade policy.The Quarterly Journal of Economics 130(2), 659–702. - Dekle, R., J. Eaton, and S. Kortum (2007). Unbalanced trade.American Economic Review 97(2), 351–355. - Demidova, S. and A. Rodríguez-Clare (2009). Trade policy under firm-level heterogeneity in a small economy.Journal of International Economics 78(1), 100–112. - Estevadeordal, A., C. Freund, and E. Ornelas (2008). Does regionalism affect trade liberalization toward nonmembers?The Quarterly Journal of Economics 123(4), 1531–1575. - Fontagné, L., H. Guimbard, and G. Orefice (2022). Tariff-based product-level trade elasticities.Journal of International Economics 137, 103593. - Fontagné, L., N. Rocha, M. Ruta, and G. Santoni (2023). The economic impact of deepening trade agreements.The World Bank Economic Review 37(3), 366–388. - France24 (2025, May). EU trade chief says accelerating free trade talks with Asia. France24. - Freund, C., A. Mattoo, A. Mulabdic, and M. Ruta (2024). Is us trade policy reshaping global supply chains?Journal of International Economics 152, 104011. - Freund, C. and E. Ornelas (2010). Regional trade agreements.Annu. Rev. Econ. 2(1), 139–166. - Garcia-Macia, D., S. Kothari, Y. Li, and Y. Tao (2025). Industrial policy in china: Quantification and impact on misallocation. Technical report, IMF Working Paper. - Giri, R., K.-M. Yi, and H. Yilmazkuday (2021). Gains from trade: Does sectoral heterogeneity matter?Journal of International Economics 129, 103429. - Gopinath, G., P.-O. Gourinchas, A. F. Presbitero, and P. Topalova (2025). Changing global linkages: A new cold war?Journal of International Economics 153, 104042. - Gros, D. (1987). A note on the optimal tariff, retaliation and the welfare loss from tariff wars in a framework with intra-industry trade.Journal of international Economics 23(3-4), 357–367. - Handley, K. and N. Limão (2022). Trade policy uncertainty.Annual Review of Economics 14(1), 363–395. - Head, K. and T. Mayer (2014). Gravity equations: Workhorse, toolkit, and cookbook. InHandbook of international economics, Volume 4, pp. 131–195. - Head, K. and T. Mayer (2021). The United States of Europe: A gravity model evaluation of the four freedoms.Journal of Economic Perspectives 35(2), 23–48. - Hodge, A., M. R. Piazza, F. Hasanov, X. Li, M. Vaziri, M. A. Weller, and Y. C. Wong (2024). Industrial policy in europe: A single market perspective. Technical report, International Monetary Fund. - Ignatenko, A., A. Lashkaripour, L. Macedoni, and I. Simonovska (2025). Making america great again? the economic impacts of liberation day tariffs. Working Paper 33771, National Bureau of Economic Research. - IMF (2024). Peoples republic of china 2024 article iv consultation.IMF Country Report, Number 21/6. - IMF (2025). WORLD ECONOMIC OUTLOOK.World Economic Outlook - April 2025. - Johnson, H. G. (1953). Optimum tariffs and retaliation.The Review of Economic Studies 21(2), 142–153. - Ju, J., H. Ma, Z. Wang, and X. Zhu (2024). Trade wars and industrial policy competitions: Understanding the us-china economic conflicts.Journal of Monetary Economics 141, 42–58. - Kumhof, M. M., M. D. Muir, S. Mursula, and M. D. Laxton (2010).The global integrated monetary and fiscal model (GIMF)–theoretical structure. International Monetary Fund. - Lashkaripour, A. (2021). The cost of a global tariff war: A sufficient statistics approach. Journal of International Economics 131, 103419. - Lashkaripour, A. and V. Lugovskyy (2023). Profits, scale economies, and the gains from trade and industrial policy.American Economic Review 113(10), 2759–2808. - Lee, G. M. (2016). Subsidies and countervailing duties. In Handbook of Commercial Policy, Volume 1, pp. 161–210. Elsevier. - Lee, W., A. Mulabdic, and M. Ruta (2023). Third-country effects of regional trade agreements: A firm-level analysis.Journal of International Economics 140, 103688. - Maggi, G. (2014). International trade agreements. InHandbook of international economics, Volume 4, pp. 317–390. - Mattoo, A., A. Mulabdic, and M. Ruta (2022). Trade creation and trade diversion in deep agreements.Canadian Journal of Economics/Revue canadienne d’économique 55(3), 1598–1637. - Ornelas, E. (2005). Endogenous free trade agreements and the multilateral trading system.Journal of international Economics 67(2), 471–497. - Ossa, R. (2014). Trade wars and trade talks with data.American Economic Review 104(12), 4104–4146. - Ossa, R. (2016). Quantitative models of commercial policy. InHandbook of commercial policy, Volume 1, pp. 207–259. - Reuters (2025, March). Carney promises C2blnf undtoboostCanadianautoindustry.Reuters. - Rodríguez-Clare, A., M. Ulate, and J. P. Vasquez (2025). The 2025 Trade War: Dynamic Impacts Across U.S. States and the Global Economy. Working Paper 33792, National Bureau of Economic Research. - Rotunno, L. and M. Ruta (2024a). Trade implications of china’s subsidies. - Rotunno, L. and M. Ruta (2024b).Trade spillovers of domestic subsidies. International Monetary Fund. - Rotunno, L., M. Ruta, and P. Verma (2025). Cross-border spillover effects of industrial policies: A quantitative exploration. Technical report, International Monetary Fund. - Simonovska, I. and M. E. Waugh (2014). The elasticity of trade: Estimates and evidence.Journal of international Economics 92(1), 34–50. - Venables, A. J. (1987). Trade and trade policy with differentiated products: A chamberlinian-ricardian model.The Economic Journal 97(387), 700–717. - WTO (2025). Global Trade Outlook and statistics - April 2025. Technical report, World Trade Organization. ### Appendix — Figures and Tables referenced - Figure A.1: US effective tariffs and tit-for-tat retaliatory tariffs by country - Note: Import-weighted US tariffs based on announcements made until April 2. Import-weighted tariffs applied by other countries in imports from the US is based on the same increases in US tariffs applied to initial tariffs at the product-level. - Table A.1: List of trade agreements in the economic integration scenario - List of PTAsCountriesAssumptions - Signed in 2023-25: - EU-MercosurEU 27, ARG, BRA, PRY, URYNew PTA with max depth - UK-CPTPP⋄GBR, AUS, NZLNew PTA with max depth - MYS, MEX, PER, VNM, CAN,Deepening of existing PTAs - CHL, JPNto max depth - UK-IndiaGBR, INDNew PTA with max depth - Under negotiation: - Canada-IndiaCAN, INDNew PTA with max depth - Canada-MercosurCAN, ARG, BRA, PRY, URYNew PTA with max depth - Canada-IndonesiaCAN, IDNNew PTA with max depth - EU-IndiaEU 27, INDNew PTA with max depth - EU-IndonesiaEU 27, IDNNew PTA with max depth - Possible negotiations: - EU-CPTPPEU 27, AUS, NZL,New PTA with max depth - CAN, CHL, JPN, MYS, MEX,Deepening of existing PTAs - PER, VNMto max depth - RCEPAUS, BRN, KHM, CHN, JPN,New PTA with max depth - LAO, NZL, SGP, THA, VNM,between non-CPTPP - KOR, MYS, IDN, PHLmembers - EU integrationEU 27Same reduction in trade costs as over 2010-20 - Note: Bilateral tariffs are brought to zero for liberalizing country-pairs. Estimates fromMattoo et al.(2022) and Adilbish et al.(2025) for EU integration are used to quantify the reduction in non-tariff trade costs – see main text for details. - Figure A.2: Counterfactual changes in effective tariffs and trade costs due to economic integration - (a) Tariffs (b) Non-tariff trade costs - Note: Panel (a) shows the trade-weighted country average of differences in tariffs between a counterfactual scenario where the trade agreements under the economic integration are implemented, and baseline. Panel (b) shows the trade-weighted country average percent change between a counterfactual scenario where the trade agreements under the economic integration are implemented, and baseline. They-axis use exports as weight and reports average tariffs from the exporter’s perspective. Thex-axis use imports as weight and reports average tariffs from the importer’s perspective. Both panels include only countries that in the economic integration scenarios participate in at least one trade liberalization shock. - Figure A.3: Simulated changes in sales to the US and total exports – US tariffs as of April 11 - Note: Top 10 exporters (plus USA) to US. Scenario with US tariffs announced until April 11 (see subsection2.2for details). Simulated change in real exports relative to a baseline with the current tariffs. - Figure A.4: Simulated changes in China’s goods exports to non-US markets – US tariffs and retaliation scenarios - Note: Percent changes. The US tariffs scenarios include US tariff increases as of April 2. The “with retaliation scenarios” scenario adds tit-for-tat increases in imports tariffs on US goods at the product level by all countries (see subsection2.2 for details). Top 20 non-US destinations of China’s exports at baseline. Changes in real exports relative to a baseline with the current tariffs. - Figure A.5: Simulated changes in goods exports – US tariffs and subsidies scenarios - Note: Percent changes. The US tariffs scenarios include US tariff increases as of April 2. The “with subsidies” scenario adds changes in subsidy rates proportional to the losses in exports to the US caused by US tariffs (see subsection2.2for details). Top 10 exporters to the US at baseline. Changes in real exports relative to a baseline with the current tariffs. - Figure A.6: Simulated changes in China’s exports to non-US countries by sector – US tariffs and subsidies scenarios - (a) US tariffs (b) With subsidies - Note: Percent changes. The US tariffs scenarios include US tariff increases as of April 2. The “with subsidies” scenario adds changes in subsidy rates proportional to the losses in exports to the US caused by US tariffs (see subsection2.2 for details). Changes in real exports relative to a baseline with the current tariffs. - Figure A.7: Simulated changes in real income across policy mixes - Note: Percent changes. See main text for a description of each component of the policy scenarios. All scenarios include the “US tariff” policy changes as of April 2. Ten economies with largest real GDP in 2023, plus Canada. Changes for regional groupings and world aggregate are computed as a GDP-weighted average of simulated changes in real income. - Figure A.8: Simulated changes in real income under “US deals” scenarios - Note: Percent changes. The “US tariffs” scenario include the changes in US tariffs as of April 2. The “US deals (preferential)” scenario simulates reductions in the bilateral product-level tariffs of each country to the level of the bilateral tariff imposed by the US (if lower). The “US deals (MFN)” scenario extends the bilateral tariff reductions to all other countries within the same product. Product-level tariff changes are aggregated to the sector level using import weights. Ten economies with largest real GDP in 2023, plus Canada. Changes for regional groupings and world aggregate are computed as a GDP-weighted average of simulated changes in real income. *Source: wpiea2025147 - References (wpiea2025147 - References).* --- _Source: https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025147.pdf_