This dissertation studies how import tariffs affect the behavior of households and firms. Chapter I addresses a positive question of central policy relevance: what is the impact of import tariffs on the trade balance and the current account? Standard models of the current account largely abstract from trade policy, while much of the trade literature focuses on the effects of tariffs on trade flows, typically overlooking the financial counterpart implied by the balance-of-payments identity. My first chapter takes a step toward bridging these strands of the literature. I develop a general framework with two large open economies, incomplete markets, and household heterogeneity. In this setting, the effects of tariffs are governed not only by expenditure switching and intertemporal substitution, but also by the incidence of tariff shocks across households with different marginal propensities to consume and save. Heterogeneity generates an income multiplier that amplifies consumption responses and dampens savings adjustments, while strengthening the terms-of-trade appreciation in the presence of home bias. As a result, the positive impact of tariffs on the trade balance is smaller than in representative-agent models, highlighting the importance of integrating distributional considerations into the analysis of trade and current account imbalances.
In Chapter II, I build on the framework from Chapter I and focus on the impact of permanent import tariffs outside the steady state. I simulate the transition of the United States from a regime of financial autarky to one of financial integration, and introduce permanent tariff shocks at a point at which the country runs both a trade deficit and a current account deficit. Despite the presence of the open-economy multiplier discussed in the previous chapter, I find that heterogeneity has a short-lived effect on the response of the trade balance and the current account to permanent tariff shocks, while the shift in the long-run net foreign asset position of the country is similar across heterogeneous- and representative-agent models.
Chapter III, coauthored with Agustín Gutiérrez, Sebastian Heise, and Felix Tintelnot, shifts the focus from households to firms, and studies how multinational enterprises (MNEs) shape the design of trade policy. Motivated by new empirical evidence from U.S. Census data on the differential response to trade policy between MNEs and non-MNEs, we develop a quantitative general equilibrium model with multinational production, capturing endogenous relocation of production and profit shifting through foreign affiliates. In this environment, multinational activity alters the canonical logic of optimal tariffs: it attenuates terms-of-trade gains, introduces new profit-shifting motives, and breaks the equivalence between import tariffs and export taxes.