New Department Working Paper: Pau Pujolas

We have a new working paper from Pau Pujolas!

Trade Wars with Trade Deficits

Pau Pujolas is an Associate Professor for the Department of Economics, as well as the graduate placement officer. His research interests are in international economics and macroeconomics.

His working paper is titled, “Trade Wars with Trade Deficits”, with Jack Rossbach.

Abstract

This paper examines optimal tariff-setting in the context of bilateral and aggregate trade imbalances. Using an illustrative model, we show that larger trade deficits behave similarly to more inelastic foreign demand, enhancing a country’s ability to alter its terms of trade and benefit from a trade war. Consequently, trade imbalances can increase optimal tariff rates. We quantitatively evaluate a hypothetical trade war between United States and China-the countries with the greatest bilateral trade imbalance-using a multi-region, multi-sector applied general equilibrium model in which we compute optimal tariffs, a first due to computational complexity. We find the United States gains from a trade war with China; but minimally (0.016 percent of GDP). Nevertheless, we find both countries sustained minor welfare losses from their recent trade dispute, in which tariff increases were negatively correlated with optimal tariffs changes. We show after service sectors and input-output linkages are accounted for, both countries are better off in a world with free trade.

For the full set of working papers, visit RePEC/ideas.

You can stay up to date with Pau, through his professional website, and twitter.