Macroeconomics of tariffs with global production and finance networks

May 18, 2026 - 11:12

Tariffs are back as a tool for economic and geopolitical strategy, but economists are still working out exactly how they ripple through the economy in the short and medium term. A new research framework tries to fill that gap by weaving global production networks into a standard open-economy model. The results suggest that tariffs are more complex than simple taxes on imports.

The framework shows that tariffs act as both a demand shock and a supply shock at the same time. Their final impact depends heavily on how production is linked across borders, how sticky prices are, and how central banks at home and abroad respond. When these features are included, even temporary tariffs can cause persistent inflation and large losses in output. The effects also spill over to other countries, even when there is no retaliation.

The key insight is that modern supply chains amplify the shock. A tariff on one component can stall production in multiple countries, raising costs and reducing output simultaneously. This makes the macroeconomic outcome much worse than models that treat tariffs as a simple tax on final goods. The research highlights that ignoring production networks and monetary policy reactions leads to a serious underestimation of the damage tariffs can do.