Predicting the global future by politicians

TARIFF TROUBLES

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Countries are panicking, reacting impulsively, and focusing more on immediate disruptions than on long-term economic impacts. However, for meaningful discourse, economists, central banks and political leaders need to assess these developments through a macroeconomic lens.

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Let us consider three possible international responses to US-imposed tariffs: equal retaliation, asymmetric response and aggressive retaliation. In the first case of equal retaliation -- commonly referred to as a tit-for-tat approach -- Country A imposes equivalent tariffs on US exports in response to US tariffs. In this scenario, both countries experience a reduction in export volumes and higher import prices, leading to a decline in net exports.

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Now, moving on to soft retaliation, often referred to as an asymmetric response. In this scenario, let us assume Country B imposes less severe retaliatory measures, possibly due to diplomatic ties or strategic restraint. As a result, Country B’s exports may decline more sharply, while imports from the US continue with fewer barriers. This situation can lead to a worsening trade balance, lower net exports and a leftward shift in aggregate demand (AD).

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These conditions may trigger domestic unrest and prompt demands for reciprocal action or renegotiation from pressure groups and business lobbies. If the government yields to these pressures, Country B may escalate tariffs or pursue new fair-trade agreements. However, if the government remains passive, the continued trade imbalance could lead to currency depreciation, widening inequalities, and slower long-term growth. Aggregate demand would remain low, keeping real GDP below potential GDP and contributing to rising unemployment.

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Now, moving on to soft retaliation, often referred to as an asymmetric response. In this scenario, let us assume Country B imposes less severe retaliatory measures, possibly due to diplomatic ties or strategic restraint. As a result, Country B’s exports may decline more sharply, while imports from the US continue with fewer barriers. This situation can lead to a worsening trade balance, lower net exports and a leftward shift in aggregate demand (AD).

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