Who Makes What
The 2025 Trade War: Dynamic Impacts Across U.S. States and the Global Economy
Andrés Rodríguez-Clare, Mauricio Ulate & Jose Vasquez
NBER Working Paper, May 2025
Abstract:
We use a dynamic trade and reallocation model with downward nominal wage rigidities to quantitatively assess the economic consequences of recent U.S. tariff increases on imports from Mexico, Canada, and China, as well as the "reciprocal" tariff changes announced on "Liberation Day" and retaliatory measures by other countries. Higher tariffs lead to a rise in U.S. manufacturing employment, but this comes at the cost of declines in service and agricultural jobs. Overall employment falls, as lower real wages reduce labor-force participation. Real income in the U.S. declines by about 1% by 2028, the final year we assume the tariffs remain in effect. A key feature of our analysis is the disaggregation of the U.S. into its 50 states, incorporating cross-state redistribution of tariff revenue. This allows us to identify which states gain or lose more from the policy shock. Around half of the states experience real income losses, with some seeing declines greater than 3%. At the international level, close U.S. trading partners -- including Canada, Mexico, China, and Ireland -- suffer the largest real income losses.
Free Trade and the Formation of Environmental Policy: Evidence from US Legislative Votes
Jevan Cherniwchan & Nouri Najjar
American Economic Journal: Economic Policy, May 2025, Pages 224-258
Abstract:
We test the hypothesis that governments alter environmental policy in response to trade by studying NAFTA's effects on the formation of environmental policy in the US House of Representatives between 1990 and 2000. We find that reductions in US tariffs decreased political support for environmental legislation. This decrease appears to be due to (i) a reduction in support by incumbent Republican legislators in response to trade-induced changes in the policy preferences of their constituents and (ii) changes in partisan representation in affected districts due to decreased electoral support for pro-NAFTA Democrats following the agreement.
Is trade the enemy of environment?: Congressional voting on environmental policies after the China shock
RyuGyung Park
International Interactions, forthcoming
Abstract:
How does trade competition affect support for environmental protection? On the one hand, import shocks can dampen support for environmental protection, as international trade can lead to a race to the bottom or a regulatory chill. On the other hand, import competition can drive 'dirty' industries and firms out of business, reducing opposition to pro-environment legislation. The impact of import shocks on environmental protection is thus an empirical question. I leverage a sudden increase in Chinese imports in the United States after the two countries normalized their trade relations. I examine how import shocks experienced by each congressional district affect the pro-environmental score of the district's representative in the U.S. House of Representatives from 1992 to 2014. My results show that bigger import shocks are positively associated with higher pro-environmental scores of the legislators. The findings suggest that as import shocks decrease the size of dirty industries, it paves the way for the legislators to pursue more pro-environmental policies.
Quantity vs. Value: Divergent Innovation Outcomes Under Chinese Import Pressure
Erik Lie & Keyang (Daniel) Yang
University of Iowa Working Paper, May 2025
Abstract:
We explore the impact of Chinese import competition on innovation in U.S. manufacturing firms. Our analysis uncovers a striking divergence in innovation outcomes: although firms boost their patent output, the economic value and technological significance of these patents decline. More specifically, the firms transition from groundbreaking inventions to a series of incremental advancements aimed at differentiating their product lines. Our findings reconcile two foundational views on competition and innovation -- one emphasizing rent erosion and the other innovation stimulation -- by showing that competitive pressure can simultaneously encourage more innovation while reducing its economic value.
Are Routine Jobs Moving South? Evidence from Changes in the Occupational Structure of Employment in the United States and Mexico
Guido Matias Cortes & Diego Morris
Journal of Human Capital, forthcoming
Abstract:
Employment in middle-wage jobs has declined in the United States over recent decades. At the same time, US trade with developing countries such as Mexico has intensified. We analyze whether the loss of middle-wage employment in the United States can be attributed to increasing trade with Mexico. We do this by contrasting the observed changes in employment across 175 detailed occupational categories in the two countries and find that, with few exceptions, occupations that declined in the United States have also declined in Mexico. The evidence is inconsistent with the hypothesis that trade between the United States and Mexico is a primary driver of the decline of middle-wage employment in the United States.
International contraction for the sake of international expansion
Niron Hashai, Christian Geisler Asmussen & Netanel Drori
Strategic Management Journal, forthcoming
Abstract:
We present novel theoretical arguments suggesting that the contraction of international market presence does not only allow firms to expand their presence into new business domains, but also to resume their international market presence in the long term. We argue that when firms contract their international market presence, they spark two subsequent processes: First, they free up non-scale free financial resources that become available for expanding into new business domains. Subsequently, such expansion creates new scale free technological knowledge resources that facilitate renewed international expansion. We find support for the existence of this novel growth trajectory in an analysis of changes in the international market presence and business segment presence of an extensive sample of public US-based firms between 1997 and 2019.
Neoliberalism and Globalization Are Not Undermining Democracy: Panel Evidence From More Than 140 Countries, 1980-2022
Stefani Branilović & Tibor Rutar
American Journal of Economics and Sociology, forthcoming
Abstract:
The rise of neoliberal reforms in the period of globalization is often claimed to be linked with wider outcomes, such as increased inequality, unemployment, and different cultural grievances. Because of these economic and cultural concerns, voters might seek solutions to their ostensible problems by turning to illiberal populist parties, which tend to undermine democracy and its basic principles. The present article empirically tests if neoliberalism, operationalized with the Fraser Institute's Economic Freedom of the World, and globalization, operationalized with the KOF's Globalization Index, were somehow associated with democratic integrity. The analysis is performed through fixed-effects regressions in more than 140 countries between 1980 and 2022. The main results show that over-time increases in both neoliberalism and globalization predicted over-time increases in five different types of democracy scores. Furthermore, the analyses with disaggregated indexes showed that freedom of international trade, modesty of regulation, legal system and property rights, and social globalization are what drive the relationship at the aggregate level. Results also showed that there are no statistically significant relationships between economic freedom and Freedom House's democracy scores specifically in the time period between 2011 and 2022. Furthermore, there are no statistically significant results indicating a relationship between globalization and democracy during the same time period. This is an interesting observation since this time period is commonly understood as most clearly embodying the democratic recession.
Global competition, local unions, and political representation: Disentangling mechanisms
Michael Becher & Daniel Stegmueller
American Journal of Political Science, forthcoming
Abstract:
While recent scholarship has demonstrated multiple political effects of international trade, less attention has been paid to unbundling the mechanisms through which import competition affects democratic politics. One mechanism, in theory, works through labor unions as domestic countervailing powers shaping legislative responses on compensation and trade votes. We assess the relevance of unions as a mediating variable in the US Congress. For identification, we leverage two distinct sources of exogenous variation, one instrument for import exposure and another for unionization, and combine them in a semiparametric estimator. We find that (i) import competition lowers district-level unionization, (ii) weaker unions lead to less legislative support for compensating economic losers and less opposition to trade deregulation, and (iii) the union mechanism represents a large fraction of the overall effect of import exposure on legislative votes. The results help explain weak compensation and further trade liberalization in the face of rising global competition.
The Tariff Tax Cut: Tariffs as Revenue
George Alessandria et al.
NBER Working Paper, May 2025
Abstract:
We evaluate the aggregate effects of a change in tariffs on the US and world economies when tariff revenue is used to enact fiscal reform. Our model combines a standard international model of fiscal policy with taxes and a dynamic model of trade participation and tariffs that allows for uncertainty and transitions. We consider effects of permanent and temporary tariffs -- with and without retaliation -- when tariff revenue is used to reduce taxes on capital or labor or to subsidize investment. Compared to a lump sum redistribution, using tariff revenue for these reforms always boosts economic activity. Key to our analysis is the effect of trade dynamics on import substitution, such that tariff revenue after an increase in tariffs is higher in the short run than in the long run. When increasing the tariff by 20 percentage points, the revenue raised is largest when tariffs are temporary, unilateral, and used to subsidize investment, increasing by about 2 percent of GDP. This case also yields a large temporary increase in the trade balance. We find the welfare-maximizing unilateral tariff is close to 18 percent when tariff revenue is used to subsidize investment compared to 0 percent under a lump sum redistribution. We also find cutting capital taxes does not generate as much growth as introducing an investment subsidy since tariffs raise the price of investment substantially.
The Macroeconomics of Tariff Shocks
Adrien Auclert, Matthew Rognlie & Ludwig Straub
NBER Working Paper, April 2025
Abstract:
We study the short-run effects of import tariffs on GDP and the trade balance in an open-economy New Keynesian model with intermediate input trade. We find that temporary tariffs cause a recession whenever the import elasticity is below an openness-weighted average of the export elasticity and the intertemporal substitution elasticity. We argue this condition is likely satisfied in practice because durable goods generate great scope for intertemporal substitution, and because it is easier to lose competitiveness on the global market than to substitute between home and foreign goods. Unilateral tariffs do tend to improve the trade balance, but when other countries retaliate the trade balance worsens and the recession deepens. Taking into account the recessionary effect of tariffs dramatically brings down the optimal unilateral tariff level derived in standard trade theory.
An Anatomy of U.S. Establishments' Trade Linkages in Global Value Chains
Aaron Flaaen et al.
NBER Working Paper, April 2025
Abstract:
Global value chains (GVC) are a pervasive feature of modern production, but they are hard to measure. Using confidential microdata from the U.S. Census Bureau, we develop novel measures of the linkages between U.S. manufacturing establishments' imports and exports. We document three new GVC patterns. First, for every dollar of exports, imported inputs represent 13 cents in 2002 and 20 cents by 2017, substantially higher than what aggregate data suggests. Second, we find strong complementarities between input and output markets reflected in "round-trip" trade linkages where an establishment sources inputs from and exports output to the same country. Third, we find a strong positive association between regional trade agreements and GVC trade flows. The aggregate data used to build global input-output tables requires proportionality assumptions that we find mute these relationships. Finally, with a simple model, we show that the round-trip results are consistent with a notion of firm and country-specific fixed costs that are at least partially common between sourcing (imports) and foreign sales (exports).