We evaluate the macroeconomic effects of protectionist measures introduced in the United States, China, and the euro area, using a multi-country dynamic general equilibrium model. In the euro area, the monetary policy rate is at its lower bound. We first consider a temporary increase in US tariffs on Chinese products, with retaliation. We then assume a moderate increase in US tariffs also on imports from the euro area, with retaliation.
A bilateral tariff dispute between the US and China would reduce economic activity in the two countries, with small positive effects on euro-area exports ("trade diversion" effect). A simultaneous tariff increase between the US and the euro area would reduce GDP and (ex-tariff) inflation in the euro area. The ELB would magnify the fall in GDP.
