Spatial spillovers of US tariff policy

Abstract Given the growing importance and deeply interrelated nature of international supply chains, we investigate whether spatial spillover effects arise from trade relationships between countries following the substantial U.S. tariff changes announced by the new U.S. administration in early 2025. In doing so, we contribute to a literature that uses crises and other unexpected economic shocks to examine how effects propagate across countries. Our findings indicate robust spatial spillovers through trade linkages. Given the timing and evolution of spillovers, we interpret this as evidence of the importance of supply-chain connections that increasingly shape international commerce. Using data from April 2025, in the week immediately preceding and three weeks following the major U.S. tariff announcements, we estimate spillovers in stock market returns for 45 countries with the highest GDP in 2024, while controlling for U.S. tariff announcements and export exposure to the United States, China, and the rest of the world (ROW). The estimation is based on a spatial error model to account for spillovers arising from omitted supply-chain networks. The results indicate a strong spatial spillover effect via the trade-based weighting matrix, which rises initially through the spillovers via direct exposure to US trade, evolving into a rise in error spillovers, and finally, the spillovers fall as more information becomes available regarding the tariffs, reducing uncertainty and allowing potential supply chain adjustments to be considered.