Title page 1

Contents 1

Abstract 2

Executive Summary 3

1. Introduction 5

2. Theoretical Model 8

2.1. Households 9

2.2. Firms 11

2.3. Government 15

2.4. Monetary Authority 15

2.5. Market Clearing and GDP 16

2.6. Tariffs 17

3. Calibration 17

4. Aggregate transmission of a US-China tariff war 21

4.1. Benchmark aggregate dynamics 21

4.1.1. Direct incidence in the US and China 22

4.1.2. Third-country transmission in the EA 24

4.2. Mechanisms behind the benchmark 25

4.2.1. Direct incidence and expenditure switching 25

4.2.2. Production-network amplification 26

4.2.3. Currency invoicing and exchange-rate pass-through 27

4.3. Third-country transmission: the EA as a net object 30

4.4. Additional robustness 32

4.4.1. Trade elasticity 32

4.4.2. Exchange-rate regime 33

5. Sectoral channels of US-China tariff transmission 35

5.1. Which Chinese sectors matter most for aggregate incidence? 35

5.1.1. Benchmark sectoral contributions 36

5.1.2. Sectoral characteristics and amplification 37

5.2. Why aggregate incidence is not a sector-local object 39

5.2.1. Own-sector incidence 40

5.2.2. Cross-sector propagation 41

5.3. Why the EA remains an offsetting-margins object 44

5.3.1. Own-sector and cross-sector terms in the EA 44

5.3.2. Large trade effects cancel in net 46

6. Conclusions 47

References 49

Appendix 50

A. Model Derivation and Log-linearization 50

B. Additional Figures and Tables 71

Acknowledgements 74

Table 1. Calibration 18

Figure 1. Benchmark Macroeconomic Dynamics 23

Figure 2. Production-Network Counterfactuals 26

Figure 3. Invoicing Regime Average Responses 28

Figure 4. Real Effective Exchange Rates by Invoicing Regime 29

Figure 5. Euro-area Net-trade Margins by Invoicing Regime 30

Figure 6. Trade Elasticity Average Responses 33

Figure 7. Exchange-rate Regime Average Responses 34

Figure 8. Sectoral Contributions to GDP 36

Figure 9. Sectoral Contributions to Inflation 37

Figure 10. Structural Determinants of Sectoral GDP 38

Figure 11. Structural Determinants of Sectoral Inflation 39

Figure 12. Own-sector Value Added and Inflation 41

Figure 13. US Sectoral Transmission Matrix 42

Figure 14. China Sectoral Transmission Matrix 43

Figure 15. Euro-area Sectoral GDP Contributions 45

Figure 16. Euro-area Sectoral Trade Margins 46

Table 1. NACE Rev. 2 sectors used in the Analysis 71