Principal Investigator: Theodore Panagiotidis, Professor at University of Macedonia
Research Team: Stylianos Daskalinas, PhD student at Tor Vergata University of Rome
Duration: July 2025 – June 2026
Overview
The resurgence of protectionist trade policy, most notably the recent US tariff escalations, has refocused attention on the international transmission of trade shocks. Prior research has extensively examined the domestic impact of tariffs on prices, trade volumes, and welfare, however there is still room for exploring how these shocks spill over into third-party countries like those in the European Union.
The EU, as a highly open and interconnected economic entity, is not only a direct target of certain tariffs but also an indirect casualty of global disruptions in trade flows and supply chains. All these channels are bound to affect prices for a third-party country. Tariffs will be passed through (partially or completely) to export prices, and so will a portion of the supply chain disruption costs and any adjustments related to market power shifts. Indirect effects will also be materialized in import prices, along with any retaliatory activity from the third-party countries towards the US. This implies that export and import prices can be used to represent the shocks generated by US tariff policies. Now, given the simultaneity of the impact of tariffs on import and export prices, it is meaningful to consider the Terms-of-Trade as effectively capturing the multi-channel effects of US tariffs. Furthermore, as a standardized price-based measure, the Terms-of-Trade allows for consistent cross-country comparisons and mitigates the measurement issues associated with heterogeneous, policy-based tariff data across the EU.
Given the heterogeneity of the EU, we can expect each country to have different spillovers from the tariffs, however there is merit in examining the extent to which spillovers will be homogenous. This should clarify if there exist subgroups of the EU for which joint shock mitigation policies can be implemented. Also, since the simultaneous effect of tariffs on export and import prices should affect countries on both ends of the spectrum, both export-intensive and import-intensive, the current tariff turmoil poses an excellent opportunity to test the finding of Di Pce et. al (2025), on the asymmetric impact of export price and import price shocks.
This proposal aims to analyze the macroeconomic effects of global trade policy shocks on EU countries, using Terms-of Trade as a proxy, with a special focus on Greece. Using a Panel Vector Autoregression (PVAR) framework, we plan to estimate impulse responses of core macroeconomic variables (GDP, inflation, trade balance) to ToT shocks across EU countries and assess the degree of heterogeneity in these responses. Particular attention will be given to whether Greece responds similarly to other EU countries, or whether it exhibits distinct dynamics due to its structural characteristics.
In order to assess the spillovers of U.S. tariffs on the EU, we consider the Panel Vector Autoregressive (PVAR) model (Hsiao and Pesaran (2005), extensive survey by Canova & Ciccarelli (2013)) on quarterly macroeconomic data for EU countries, spanning 2000–2023. The model’s structure allows us both to estimate impulse-response functions and to test for poolability among different units. Aligning with the current literature, the following variables (in log deviations from polynomial trends as in Schmitt-Grohé & Uribe (2018)) are included in the PVAR:
- Terms of trade (export price index / import price index)
- Real GDP
- Inflation (CPI or PPI)
- Trade balance
- Exchange rate (nominal or real, where applicable)
An additional model is considered, with import and export price indices included separately, so as to account for the possible asymmetry of the impact of import and export price shocks (Di Pace et al. (2025)).
For the identification of the PVARs, we use recursive ordering for the ToT in order to fix its exogeneity and consider sign restrictions for the remaining unidentified parameters, based on the stylized predictions of trade models (e.g., a positive ToT shock should initially raise output and improve the trade balance). Impulse-response functions are estimated with both positive and negative shocks, to capture the possibility of either export or import price shocks dominating the direction of the final variation. In order to investigate homogeneity, Wald-type tests can be applied to the estimates to determine poolability.
Greece poses an interesting case study for examining whether trade policy shocks produce heterogeneous macroeconomic responses within the EU. Given its relatively high import dependence, limited export diversification, and post-crisis structural reforms, Greece may respond to ToT shocks in ways that differ substantially from its peers. To explore this, we estimate country-specific impulse responses and compare Greece's dynamics to several subgroups:
- The EU average
- Southern EU countries (Italy, Spain, Portugal)
- Import-intensive economies (based on trade-to-GDP ratios)
- Countries with similar industrial structures or external balances
We will assess homogeneity of responses using:
- Pairwise IRF comparison tests (e.g., overlapping confidence intervals, Wald-type tests)
- Group-based clustering analysis to identify natural response patterns
- Interaction effects in local projection models, where Greek responses are evaluated against baseline and group means
This allows us to assess whether Greece requires tailored policy tools for trade shock absorption or whether EU-wide stabilization mechanisms suffice. It also offers broader insights into the asymmetric transmission of global shocks in monetary unions. Additionally, the trade deficits of Greece also make it an interesting candidate to test for the finding of Di Pace et al. (2025), on the possible asymmetry between export and import price shocks. This can be investigated by comparing the magnitude and duration of impulse-responses from shocks of different signs, as well as shocks implemented separately to import and export prices.
This research is expected to deliver:
- Quantified dynamic responses of EU macro variables to ToT shocks, with clear interpretations based on open-economy theory.
- Empirical validation of the role of ToT as a shock proxy for global trade tensions, especially under retaliatory dynamics, and investigation of possible asymmetries in the responses to import and export price shocks.
- Detailed evidence on heterogeneity, with Greece as a focal point, to support differentiated policy design within the EU.
- Policy guidance for trade vulnerability assessment, EU-level fiscal support mechanisms, and forecasting under global uncertainty.
Research Team