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Shi Benye | Trade Frictions, Tariff Transmission, and Macroeconomic Financial Risks

Recently, the Center for International Finance and Economics Research (CIFER) of the National Institute of Financial Research at Tsinghua University hosted...Academic Symposium on "2022 International Trade Disputes and the Restructuring of Globalization"The event was successfully held.Professor of the School of Economics, Jilin UniversitySpencerAttendDepend onCIFERresearcherAssistant Research Fellow, Institute of World Economics and Politics, Chinese Academy of Social SciencesXia GuangtaoHostCapital Market Opening-up Sub-Forum 12，Sharing with collaborators (see below) on the topic of《Trade frictions, tariff transmission and macro-financial risks》(Trade Friction, Tariff Transmission and Macro-Financial Risk）The article.

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SpencerProfessor and doctoral supervisor at the School of Economics, Jilin University; Executive Director and Deputy Secretary-General of the China Society for World Economics; Executive Director of the National Higher Education International Trade Discipline Collaboration Group; Director of the China-American Economic Association; Vice President of the Jilin Provincial Association for International Economics and Trade; Deputy Director of the Institute of American Studies, Jilin University; Executive Deputy Editor-in-Chief of *Economic Development Research*; formerly Vice Dean of the School of Economics, Jilin University. His main research areas are international economics, open macroeconomics, and the US economy. He has published 10 books (including co-authored works) and nearly 50 papers in core journals such as *People's Daily*, *Guangming Daily*, and *World Economy*. He has presided over one sub-project of a major project funded by the National Social Science Fund of China, two projects funded by the National Social Science Fund of China, and three projects funded by the Ministry of Education's Humanities and Social Sciences Program. He has received awards such as the Second Committee of 100 Outstanding Talent Award, the Jilin Provincial Scientific Research Seedling Talent Award, and the Jilin Provincial Social Science Outstanding Achievement Award.

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Spencer

This paper constructs a two-country DSGE model incorporating structured banks to explore the intrinsic link between trade frictions and macroeconomic financial risks, and investigates the impact of tariffs on the macroeconomy through the financial system in the context of Sino-US trade frictions. The paper has strong practical significance for preventing trade friction risks and maintaining national financial stability. The model incorporates structured banking as a credit intermediary. It includes two economies: a domestic (Country H) and a foreign (Country F). Each economy has six entities: residents, final goods manufacturers, intermediate goods manufacturers, capital goods manufacturers, the banking sector, and the government sector (monetary authority). Due to the principal-agent relationship between banks and depositors, the model introduces an endogenous leverage ratio constraint for the banking sector, linking overall credit volume to the net assets of the banking sector. Final goods in the model are divided into consumer goods and investment goods. Residents simultaneously purchase consumer goods in both countries for consumption, while capital goods manufacturers simultaneously purchase investment goods in both countries for capital goods production. The model also introduces three categories of import tariff shocks—consumer goods, investment goods, and intermediate goods—based on the different tax objects.

This paper draws the following conclusions: First, the tariffs imposed by the initiators of trade frictions on Chinese exports of consumer and investment goods primarily affect China's macro-financial risk through three channels: First, tariff shocks, bridging exports and output, suppress manufacturers' investment demand, affecting asset prices and leading to net asset losses and increased leverage multipliers in the banking sector; second, tariff shocks, by suppressing export demand, affect the stability of the RMB exchange rate, ultimately creating a vicious cycle between RMB depreciation and capital outflows; third, tariff shocks lead to a decrease in the risk-free interest rate and a lower savings rate in the economy, thus requiring banks to consume more capital to issue loans, directly affecting the asset and liability structure of banks. The import tariff shocks from the initiators of trade frictions all contribute to an increase in China's macro-financial risk level through these three channels. Second, China's retaliatory tariff measures in trade frictions also have a negative impact on China's macro-financial stability. Specifically, tariffs on imported consumer and intermediate goods affect total output from both the demand and production sides, indirectly suppressing investment. Tariffs on imported investment goods directly negatively impact investment demand. Insufficient investment demand leads to falling asset prices and net asset losses for banks, thereby accelerating the accumulation of risk within the financial system. Third, both trade dependence and expectations of trade frictions can influence the macroeconomic and financial risks arising from trade frictions. Appropriately reducing trade dependence and fully tapping into domestic demand potential can effectively mitigate the macroeconomic and financial risks China faces in trade frictions. Expectations of trade frictions also have a significant impact on macroeconomic and financial risks; simulation results show that economic agents' expectations of tariff increases can produce similar macroeconomic effects as tariffs are imposed.

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Nie Guangyu

Professor of Business School, Shanghai University of Finance and EconomicsNie GuangyuThe article was reviewed. Professor Nie Guangyu first summarized the model's structure, noting its rich theoretical framework and timely exploration of important research questions. He then offered several suggestions: First, while the article presents a complex structural model encompassing multiple sectors and various shocks, the analysis and conclusions are primarily qualitative, lacking quantitative results. Adding quantitative analysis could enhance the reliability of the conclusions. Second, the article emphasizes the role of tariffs through the financial system; this could be further clarified in the quantitative analysis. For example, a model without bankers could be implemented to compare the dynamics of external shocks; or the financial friction coefficient could be varied to compare quantitative results. Third, a more detailed analysis could be conducted on how the baseline model characterizes tariff wars. For instance, how to view tariff wars (trade wars) as temporary shocks or structural changes, and given a country's need for retaliatory tariffs, what form (investment goods, consumer goods) would be the most cost-effective? Alternatively, VAR regression could be used to examine whether the model's dynamics closely approximate real economic fluctuations. Fourth, the conclusions and policy recommendations could be more closely aligned with the results of the quantitative analysis.

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