Tariffs shift burden, networks amplify trade war spillovers
An ECB working paper finds that a US-China tariff war generates asymmetric economic incidence, with the targeted country facing larger output contractions. Production networks and currency invoicing significantly amplify and shape these spillovers.
Asymmetric burdens, amplified shocks
A reciprocal 10 percentage-point tariff increase generates asymmetric incidence: the tariff-imposing country bears more of the inflationary burden, while the targeted country experiences the larger output contraction.
Production networks amplify this contraction by propagating the shock beyond the directly tariffed bilateral margin.
Currency invoicing further shapes transmission, with dollar-priced border prices weakening the expenditure-switching role of exchange rates and deepening contractions.
The euro area response is small in the aggregate, but only because positive trade-diversion margins are offset by weaker demand from China and multilateral adjustments.
Sectoral incidence is highly concentrated, but aggregate effects cannot be inferred from the directly tariffed sector alone.
The results show that tariff incidence depends jointly on where the tariff lands, how the shock propagates through production networks, and how invoicing governs border-price adjustment.
Modeling global trade friction
The paper develops a multi-country, multi-sector New Keynesian model to study the short-run macroeconomic transmission of a US–China tariff war.
The framework encompasses four economic blocs—the United States, China, the euro area, and the rest of the world—each comprising 44 sectors.
Three features distinguish the model: domestic and international input–output linkages, sectoral nominal rigidities calibrated to price-adjustment frequencies, and heterogeneous currency invoicing.
Integrating these mechanisms captures transmission patterns not found in frameworks incorporating only a subset of them.
The benchmark experiment involves a reciprocal 10 percentage-point tariff increase across all tradeable manufacturing sectors.
Beyond bilateral trade shares
This study provides a crucial framework for understanding the complex, non-linear effects of trade policy.
It challenges simplistic views of tariffs as bilateral tools, highlighting the deep structural impacts often overlooked.
Policymakers must consider network effects and invoicing regimes to avoid unintended consequences.