Trade Partners’ Responses to US Tariffs

IMF Working Papers, July 18, 2025

Source details

Recently announced and enacted US tariffs reduce partners’ access to the US market and lead to trade diversion.
Impacted countries may respond in (at least) three ways:
- imposing retaliatory tariffs on the US,
- resorting to industrial policy (subsidies) to support their producers,
- signing trade agreements to find new market access opportunities.
The study relies on a quantitative trade model to analyze trade and welfare implications of these policy responses.

Retaliation:
- Hurts US exports.
- Can improve the retaliating countries’ terms of trade.
- Creates distortions in global trade.
Subsidies / industrial policy:
- Can expand exporters’ market shares, making up for lost markets in the US.
- Are costly to implement.
- Increase distortions, especially for the subsidizers.
- Worsen trade diversion effects and could lead to new tariffs targeting subsidizers.
Deeper integration / signing trade agreements:
- Helps countries expand trade while reducing distortions.
- Even in presence of US tariffs, real income for the liberalizing countries and the world is higher when partners choose to deepen integration as part of their policy strategy.

Retaliatory tariffs: potential short-term improvement in terms of trade but higher global distortions and adverse effects on US exports.
Subsidy-based industrial policy: may protect or expand domestic exporters but carries fiscal costs and raises the risk of escalation and further protectionist measures.
Trade liberalization with other partners: a welfare-improving path that mitigates trade diversion and reduces distortions relative to retaliation or subsidy approaches.

Analysis based on a quantitative trade model (details in the Working Paper).
Focus on trade and welfare implications across affected partners, the US, and global outcomes.

Source: "Trade Partners’ Responses to US Tariffs", IMF Working Papers, Lorenzo Rotunno and Michele Ruta, July 18, 2025.