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      Trade Wars with Trade Deficits

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          Abstract

          Trade imbalances significantly alter the welfare implications of tariffs. Using an illustrative model, we show that trade deficits enhance a country's ability to alter its terms of trade, and thereby benefit from tariffs. Greater trade deficits imply higher optimal, or welfare maximizing, tariffs. We compute optimal unilateral and Nash equilibrium tariffs between the United States and China the countries with the largest bilateral trade imbalance using a multi-region, multi-sector applied general equilibrium model with service sectors and input-output linkages, a computationally complex task. We find the United States gains from such a trade war with China, albeit minimally.

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          Author and article information

          Journal
          22 November 2024
          Article
          2411.15092
          6815b1cc-1d40-401b-afe7-1fdcba108ea3

          http://arxiv.org/licenses/nonexclusive-distrib/1.0/

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          Custom metadata
          58 pages, 9 figures, 13 tables
          econ.GN q-fin.EC

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