Espinosa Diaz, Cristian Andres; (2025) Essays on Trade Policy and Macroeconomic Stability. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

This thesis examines the effects of government policies, such as tariffs at the industry and aggregate levels, and the macroeconomic impact of carbon taxes. The first chapter examines the welfare costs of tariffs. I develop a political economy model showing that tariffs are strategically targeted during trade wars. This selection affects the estimation of trade elasticities: revenue-motivated governments tax sectors with low demand elasticity, while retaliation targets high-elasticity goods to maximize harm. As trade policy focuses on the extremes of the elasticity distribution, Trump’s tariffs align with low estimates around 2.5, while Canada’s retaliation yields an upper-bound estimate of 5.2. With zero export supply elasticity, the welfare cost of tariffs could potentially be twice as high. The second chapter estimates the dynamic effects of import tariffs on key macroeconomic aggregates. Using data on temporary trade barriers, I show that these tariffs are countercyclical, inducing bias in the computation of impulse response functions. To address this, I develop a novel instrument based on retaliatory tariffs. Since retaliation responds to a partner’s action, it is less likely to correlate with domestic shocks. Moreover, under reciprocity, retaliatory tariffs mirror those imposed by trade partners. Using this instrument in a Proxy-SVAR, I find that tariffs have a highly contractionary effect. The third chapter, co-authored with Pablo Gutierrez Cubillos and Bastián Castro Nofal, evaluates the role of carbon taxes as automatic stabilizers in small open economies specializing in the export of a single commodity. We examine the carbon tax's ability to reduce the volatility of the real exchange rate and energy prices. Using a DSGE model calibrated to the Chilean economy, which is highly specialized in copper production, we find that the tax reduces energy and energy price volatility and lowers the variance of the real exchange rate.

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