The Effect of Tariffs on Economic Growth: An Analysis Using Godley's Sectoral Balance Approach

This study examines how tariff-induced trade shocks propagate through China's macroeconomic sectors using Wynne Godley's Sectoral Balance Approach. Employing annual data from 1982 to 2025, we apply Augmented Dickey-Fuller and DF-GLS unit root tests, Johansen cointegration analysis, and a Vector Error Correction Model (VECM) to identify long-run equilibrium relationships and short-run adjustment dynamics among the private, public, and external sectors. Our results confirm that all three sectoral balances are integrated inof orderne, I (1), and that the private and public balances are cointegrated with a long-run coefficient of approximately 1.20 on the public balance. The private sector is the primary error-correcting mechanism (α = −0.359, p = 0.004), absorbing approximately 36 percent of disequilibrium annually, while the public sector behaves as weakly exogenous (α = + 0.056, p = 0.406), acting as an autonomous stabilizing force. Granger causality tests confirm a unidirectional causal flow from the public to the private balance (χ² = 7.647, p = 0.022), but not in the reverse direction. Impulse response analysis reveals that a fiscal shock generates a sustained negative response in the private balance over a 10-year horizon, consistent with the Ricardian offset hypothesis. Structural break tests identify 2001 China's WTO accession as the dominant turning point in the private– public relationship. These findings contribute to the empirical literature on Sectoral balance approach macroeconomics and provide policy-relevant insights into the macroeconomic consequences of trade protectionism.