Tariff Policy Activism and the Trade Balance Under Multiplicative Uncertainty: A Cautionary Tale

In the face of multiplicative uncertainty about the effects of a tariff on the trade balance, policymakers should err on the side of caution and use tariffs less aggressively. This important insight is illustrated in two separate cases, one where multiplicative uncertainty arises only in the pass-through from the tariff to import prices, and the other where multiplicative uncertainty is present in both the pass-through to import prices and the elasticity of the trade balance with respect to import prices.