This repository explores the economic impact of U.S. tariffs on GDP and recession risk using Structural Equation Modeling (SEM). The project evaluates how protectionist policies, particularly those introduced during the 2018 and 2025 trade wars between the U.S. and China, influenced key macroeconomic indicators. It features two main SEM frameworks:
- GDP Slowdown Analysis: Assesses how tariff shocks influence sectoral output and GDP.
- Recession Risk Modeling via Yield Curve Behavior: Evaluates how tariffs flatten the yield curve, a well-known recession indicator.
Both models use publicly available macroeconomic datasets and are structured using preprocessed variables for empirical clarity.
tariff/
├── GDP_Growth.xlsx # Supporting data for GDP trends
├── GDP_Slowdown.ipynb # Jupyter notebook for GDP SEM modeling
├── preprocessed.xlsx # Preprocessed data for GDP SEM
├── preprocessed2.xlsx # Preprocessed data for recession/yield curve SEM
├── Recession_Signals.ipynb # Jupyter notebook for yield curve SEM model
├── Tax_Receipts.xlsx # Raw or processed input for tariff revenue
├── Yield_Curve.xlsx # Yield curve data for U.S. term structure analysis
├── README.md # Project overview (this file)
├── researchp.docx # Original research documentation
This SEM model explores how the shocks introduced by tariffs (both in price and revenue) indirectly and directly impact GDP through intermediate effects on sectoral output. The model provides insight into transmission channels and relative variable significance.
- Tariff Policy Shock: Proxy for protectionist pressure, constructed from tariff revenue, import prices, and real imports.
- Sectoral Output Decline: Captures macroeconomic slowdown through real GDP and import volume.
- GDP Growth: Ultimate endogenous indicator representing economic health.
Measurement Model:
Tariff_Shock =~ Tariff_Revenue + Real_Imports + Import_Price
Sector_Output =~ Real_GDP + Real_Imports
GDP =~ Real_GDP
Structural Model:
Sector_Output ~ Tariff_Revenue + Real_Imports + Import_Price
GDP ~ Tariff_Revenue + Real_Imports + Import_Price + Sector_Output
| Path | Estimate | Interpretation |
|---|---|---|
| Real_Imports ~ Sector_Output | 0.00425 | Insignificant positive effect |
| Sector_Output ~ Tariff_Revenue | -0.00415 | Weak direct effect from tariffs |
| Sector_Output ~ Real_Imports | 0.00028 | Minor correlation with import volumes |
| Sector_Output ~ Import_Price | 0.00047 | Minimal inflationary transmission |
| GDP ~ Tariff_Revenue | -0.00934 | Tariffs slightly reduce GDP |
| GDP ~ Real_Imports | 0.00129 | Marginal positive contribution |
| GDP ~ Import_Price | -0.0266 | Rising prices reduce GDP |
| GDP ~ Sector_Output | 0.884 | Sectoral health strongly predicts GDP |
Interpretation: The dominant explanatory variable for GDP is sectoral output, which acts as a mediator between tariffs and growth. Direct tariff effects are statistically minor, but they significantly influence intermediate channels.
This model estimates how key macroeconomic indicators shift the U.S. yield curve slope — the difference between short- and long-term interest rates — often used to predict recessionary phases.
Yield_Curve = Real_GDP + Tariff_Revenue + Real_Imports
| Predictor | Estimate | Std. Err | z-value | p-value |
|---|---|---|---|---|
| Real_GDP | +0.000148 | 0.000067 | 2.20 | 0.028 |
| Tariff_Revenue | –0.030809 | 0.005128 | –6.01 | <0.001 |
| Real_Imports | –0.000011 | 0.000296 | –0.037 | 0.971 |
- Tariff Revenue flattens the yield curve — consistent with increased recession risk.
- Real GDP steepens the curve — a signal of strength.
- Real Imports have no meaningful effect.
Conclusion: Increases in tariff revenue are statistically and economically significant in flattening the yield curve, indicating heightened market expectation of future economic contraction.
This section contrasts the two major tariff episodes led by the U.S. under similar leadership styles, but drastically different policy tactics.
| Aspect | 2018 Trade War | 2025 Trade War |
|---|---|---|
| Initiation Strategy | Gradual escalation with targeted goods | Immediate, universal tariffs on all imports |
| Peak US Tariff | 25% on $250B of Chinese goods | 145% in April 2025 |
| China's Retaliation | 25% on $110B US goods | 125% briefly; 10% ongoing |
| Trade Coverage | US: $550B; China: $185B | US: 100% of imports; China: 100% of US goods |
| Truce Agreement | G20 (Argentina), Dec 2018 – 90-day ceasefire | Geneva, May 2025 – 90-day framework |
| Final Resolution | Phase One Deal, Jan 2020 | London Framework, June 2025 (ongoing) |
- 2018: Characterized by phased imposition, with bilateral sector targeting and WTO engagement.
- 2025: More unilateral and immediate, resulting in broader international backlash and rapid yield curve inversion.
- Both shared temporary truces and retaliatory measures but differed in economic aggression and scope.