Cover of EconPol Policy Brief 13

Trump’s trade attack on China – who laughs last?

Gabriel Felbermayr and Marina Steininger
Abstract

This policy brief uses a modern general equilibrium trade model to simulate the effects of the Chinese-American trade dispute. It finds that the tariffs and countertariffs implemented as of today cost the US 2.6 billion and China 5.7 billion of GDP.

Both economies lose, but China loses absolutely and relatively much more. Europe, in contrast, could register a GDP gain of 345 million. Chinese exports to the US go down by 52.1 billion, while US exports to China fall by 37.1 billion, so the US trade balance slightly improves.

A full-blown tariff war, where both parties tax all imports by additional 25%, would lower US GDP by 9.5 billion and Chinese GDP by 30.4 billion. If the objective of President Trump is to use trade policy to increase the economic distance with China, an escalation helps.

Such a trade war would increase value added in the US manufacturing sector by 0.6% while the agri-food sector would shrink by 1.22%. In China, manufacturing would decline by 0.8%. Chinese exports to the US would fall by a whopping 171.3 billion, while US exports to China would contract by 51.0 billion. So, the bilateral trade balance of the US with China improves; however, with the EU it deteriorates. Hence, while Europe may benefit slightly from trade diversion effects, its trade surplus with the US becomes even larger – foreboding further transatlantic conflict.
 

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Citation

Gabriel Felbermayr and Marina Steininger: Trump’s trade attack on China – who laughs last?, EconPol Policy Brief 13, February 2019.