There are no winners in the US/China trade war but Trump may still hit his targets, say EconPol economists

If no agreement in the Sino-American trade dispute is reached by 1 March – the end of the 90-day ‘ceasefire’ agreed by both country’s presidents - China could lose up to €171.3 billion in US exports, with US exports to China contracting by €51 billion.

In a report released today by EconPol Europe, researchers Gabriel Felbermayr and Marina Steininger use a state-of-art general equilibrium trade model to simulate the impact of the escalating dispute. After analysing four scenarios based on unilateral actions by the US in goods trade, and allowing for Chinese counter-measures, they find that while both economies lose out, “China loses absolutely and relatively much more.” And, they say, although President Trump may claim victory based on an improved trade balance with China, the current US trade deficit with Europe would become even larger and cause further transatlantic conflict.

The analysis reveals that the tariffs and counter-tariffs implemented as of today would see US exports to China fall by €37.1 billion and cost €2.6 billion of GDP. Chinese exports to the US would go down by €52.1 billion, with the country losing €5.7 billion of GDP. Europe, in contrast, could register a GDP gain of €345 million.

A full-blown tariff war, where both parties tax all imports by an additional 25%, would lower US GDP by €9.5 billion and Chinese GDP by €30.4 billion.  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% and Chinese exports to the US would fall by €171.3 billion. US exports to China would contract by €51.0 billion.

“The current tariffs and counter-tariffs give the US a slightly improved trade balance with China,” say Felbermayr and Steininger. “If the objective of President Trump is to use trade policy to increase the economic distance with China, an escalation in the tariff war would help. But, as is the case with every war, such a strategy comes with high costs.

“Trump may claim victory as the US manufacturing sector grows while the Chinese one shrinks, and the bilateral trade balance of the US with China improves. However, with the EU it deteriorates and Europe’s trade balance with the US becomes even larger.”

Read the policy brief: http://www.econpol.eu/publications/policy_brief_13

For further information on the paper, contact Gabriel Felbermayr at felbermayr@ifo.de.