Trade policy is often cast as a solution to the free-riding problem in international climate agreements. This paper examines the extent to which trade policy can deliver on this promise. We incorporate global supply chains of carbon and climate externalities into a multi-country, multi-industry general equilibrium trade model. By deriving theoretical formulas for optimal carbon and border taxes, we quantify the maximum efficacy of two trade policy solutions to the free-riding problem. Adding optimal carbon border taxes to existing tariffs proves largely ineffective, delivering only 3.4% of what could be achieved under globally optimal carbon pricing. In contrast, Nordhaus’s (2015) climate club framework, in which border taxes are used as contingent penalties to deter free-riding, can achieve 33-68% of the globally optimal carbon reduction, depending on the initial coalition (EU, EU+US, or EU+US+China). In all cases, the climate club ensures universal compliance, thereby preserving free trade.

On April 2, 2025, President Trump announced “Liberation Day,” imposing broad tariffs on imports to reduce trade deficits and revive U.S. industry. We analyze the long-term economic effects of these tariffs, finding that while they may improve U.S.’s terms of trade if trading partners do not retaliate, any welfare gains vanish under reciprocal retaliation. Assuming no retaliation, we derive the optimal U.S. tariff rate, which is approximately 25% and uniformly applied across all trade partners. This optimal structure stands in stark contrast to the USTR’s proposed tariff schedule, which varies by trading partner and is based on bilateral trade deficits. When trading partners retaliate optimally against the USTR-proposed tariffs, the U.S. experiences a welfare loss of nearly 1%, while partner countries offset virtually all the initial losses. The resulting tariff war, however, reduces global employment by 0.5%. Although the tariffs do succeed in reducing the U.S. trade deficit, the resulting deadweight losses underscore the inefficiency of using protectionist trade policy as a tool for deficit reduction.

We develop a semi-parametric framework to measure the unequal incidence of monopolistic markup distortions in the global economy. Nesting a broad class of quantitative trade models, our framework identifies two channels through which trade integration reshapes the welfare cost of markups: (1) change in markup dispersion through pro-competitive effects, and (2) international profit-shifting, which represents zero-sum transfers between countries through excess profit payments. We present a dual interpretation of the latter channel: markups function as decentralized tariffs that distort the terms of trade in favor of high-markup exporters. Drawing on global firm-level data on markups and profit ownership, we find that international profit-shifting has significantly lowered the welfare cost of markups for high-income countries while magnifying it for low-income nations. This asymmetry arises because high-income countries supply higher markup goods and receive a disproportionate share of global excess profits. We estimate that these transfers represent an 8.2% tariff burden on low-income countries, far exceeding the preferential tariff benefits they receive under existing trade agreements.

This paper develops a framework for integrating carbon pricing into existing international trade agreements, which traditionally have overlooked climate concerns. We start by showing that: (i) Countries benefiting most from trade agreements also generate higher trade-related emissions. (ii) National-level carbon taxes create pecuniary terms-of-trade externalities, causing the burden of carbon taxes imposed in one country to fall onto consumers elsewhere. Finding (i) indicates that contingent trade reforms that link market access to carbon pricing could effectively reduce emissions. However, due to the pecuniary externalities described by (ii), a redistribution mechanism may be necessary to equalize the tax burden internationally. To address this, we propose a Global Climate Fund to redistribute border-related carbon tax revenues. Quantitative analysis reveals that even a simple fund allocation mechanism could incorporate carbon pricing of up to $119 per ton of CO2 within current trade regimes, achieving a 50% reduction in global emissions.

As trade agreements face renewed pressure, we show that the rise of global value chains has multiplied the value of trade agreements to unprecedented levels. We cast our argument using a non-parametric neoclassical trade model that accommodates global input-output networks and nests a wide class of quantitative trade models as a special case. To guide our analysis, we derive analytic formulas for optimal non-cooperative trade taxes in this general framework. These formulas predict the extent of trade restriction if global trade agreements were to dissolve. Mapping these formulas to data, we quantify the value of trade agreements for various countries. We find that the disintegration of existing trade agreements will erase 30% of the overall gains from trade, which amounts to a $2.8 trillion loss in global GDP. Around 46% of this value is driven by the agreements’ facilitation of global value chains.

If governments are banned from using certain trade policy instruments, they may resort to other instruments to compensate for their lost policy space. The welfare effects of trade policy reforms, therefore, depend critically on the interdependence of various policy instruments at the governments’ disposal. Using a multi-industry general-equilibrium Ricardian trade model we find that: (i) Restricting export subsidies/taxes leads to trade liberalization, but restricting import tariffs in isolation has no such effect; (ii) If export subsidies are already restricted, negotiated tariff cuts in a subset of industries lead to unilateral cuts in other industries; and (iii) A free trade agreement that precludes the use of trade taxes may lead to the adoption of wasteful trade barriers by welfare-maximizing governments. Fitting our model to trade data for 40 major countries, we show that these effects are quantitatively significant.