Network Effects of Tariffs

2025-04-07

AI Summary

This paper investigates the systemic effects of unilateral tariff imposition on global trade networks, prices, and welfare. We develop a general-equilibrium, single-good global trade model in which tariffs are endogenized as structural variables of a directed acyclic graph (DAG) representing the international trade network. Combining analytical derivation, DAG topological analysis, and numerical simulation, we demonstrate that tariffs can trigger domestic import collapse, induce trade diversion through third-country intermediaries, and intensify foreign competition for domestic exporters—ultimately reducing net consumer welfare in the tariff-imposing country. Our key contribution is identifying two novel mechanisms—“boomerang effects” and “competitive spillovers”—through which tariffs reconfigure global trade network topology, generating nonlinear, self-defeating outcomes. This framework provides a new paradigm for analyzing the unintended, network-mediated consequences of unilateral trade policy.

Technology Category

• Multiagent Systems: Mechanism Design
• Game Theory and Economic Paradigms: Mechanism Design
• Reasoning under Uncertainty: Causality

Application Category

• Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystems
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs
• Responsible Web: Measurement, analysis, and circumvention of Web censorship

Abstract

We develop a model in which country-specific tariffs shape trade flows, prices, and welfare in a global economy with one homogeneous good. Trade flows form a Directed Acyclic Graph (DAG), and tariffs influence not only market outcomes but also the structure of the global trade network. A numerical example illustrates how tariffs may eliminate targeted imports, divert trade flows toward third markets, expose domestic firms to intensified foreign competition abroad, reduce consumer welfare, and ultimately harm the country imposing the tariff.

Problem

• Analyzing how tariffs shape trade flows and prices globally
• Examining tariffs' impact on global trade network structure
• Assessing welfare effects of tariffs on consumers and firms

Innovation

• Model with country-specific tariffs and trade flows
• Directed Acyclic Graph (DAG) for global trade network
• Numerical analysis of tariff impacts on welfare