IMF Working Papers

Trade Partners’ Responses to US Tariffs

By Lorenzo Rotunno, Michele Ruta

July 18, 2025

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Format: Chicago

Lorenzo Rotunno, and Michele Ruta. "Trade Partners’ Responses to US Tariffs", IMF Working Papers 2025, 147 (2025), accessed July 20, 2025, https://doi.org/10.5089/9798229017008.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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 to support their producers, and/or signing trade agreements to find new market access opportunities. Relying on a quantitative trade model, we study the trade and welfare implications of these policy responses. Retaliation hurts US exports, can improve the terms of trade, but also creates distortions. Subsidies can expand exports, making up for lost markets in the US, but they are costly, increase distortions especially for the subsidizers, and worsen trade diversion effects that could eventually lead to new tariffs targeting subsidizers. Seeking deeper integration with other partners can help 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.

Subject: Economic integration, Exports, Imports, International trade, Tariffs, Taxes, Trade agreements, Trade policy

Keywords: East Asia, Exports, Global, Imports, Industrial policy, Retaliation, Tariffs, Tariffs, Trade agreements, Trade agreements, Trade policy

Publication Details

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