To What Extent Are Tariffs Offset By Exchange Rates?
Professor of Economics, Johns Hopkins University
In theory, we should expect
tariffs to be partially offset by a currency appreciation in the
tariff-imposing country or by a depreciation in the country on which the tariff
is imposed. We find, based on a calibrated model, that the tariffs imposed by
the US in 2018-19 should not have had a large impact on the dollar but may have
significantly depreciated the renminbi. This prediction is consistent with a
high-frequency event analysis looking at the impact of tariff-related news on
the dollar and the renminbi. We find that tariffs explained at most one fifth
of the dollar effective appreciation but around two thirds of the renminbi
effective depreciation observed in 2018-19.