Abstract

It is well known that import competition can have strong negative effects on domestic workers. Shielding workers from these shocks is among the primary stated objectives of tariffs. In practice, however, tariffs often fail to increase domestic production. For example, the 2018 US tariffs on China benefited countries such as Thailand and Vietnam far more than domestic producers. These third country effects cannot be explained by workhorse trade models. We build on recent methodological advancements to assess the effect of bilateral tariff changes on sectoral employment while incorporating third country effects. Our framework combines flexible substitution patterns with an otherwise standard model of labor market frictions. The effects of tariffs in this environment are heterogeneous across workers and products, providing a rich laboratory for counterfactual analyses. We use our model to quantify the efficacy of tariffs in protecting domestic workers and reversing job losses from free trade.