Global Financial Spillovers of US Trade Policy

Abstract

This study examines the transmission of structural US tariff shocks to the macro‐financial conditions of 26 trading partners using a country‐specific structural vector autoregression framework estimated from January 2001 to June 2025. The empirical evidence documents significant cross‐sectional heterogeneity in international spillovers driven by competing macroeconomic forces. In economies heavily integrated into international production networks, US tariffs function as stagflationary cost‐push shocks that generate immediate inflationary pressures. In comparison, among core Eurozone exporters, a deflationary demand‐pull channel dominates because the negative income effects of external demand contraction outweigh input cost frictions. The analysis demonstrates a financial transmission mechanism through which the structural tariff shock initiates rapid asset repricing. Multivariate cross‐country regressions demonstrate that global value chain participation systematically amplifies long‐run inflationary pressures and suppresses corporate equity valuations, whereas financial openness and free trade agreements mitigate domestic macro‐financial sensitivity. Variance decompositions confirm that the structural tariff shock constitutes a primary driver of structural volatility in partner asset markets. These asymmetric spillovers force foreign central banks into a strict policy trade‐off between anchoring inflation and stabilizing aggregate demand.