The Economic Consequences of the 2018 US-China Trade Conflict: A CGE Simulation Analysis

This paper aims at evaluating the economic consequences of the 2018 US-China trade conflict. The potential impact of the proposed tariff increases is calculated using a global CGE model. Capital deepening and technological spillover induced by trade are also taken into account to explore the long-run influence. We can derive the following implications. First, the additionally imposed tariffs on goods alone declines the GDP in the US and China by 0.1% and 0.2%, respectively. The equivalent variation in the US and China is reduced by 9.8 billion and 35.2 billion USD, respectively. Although other countries gain from trade diversion, losses exceed gains globally. Second, considering the effect from capital deepening and technological spillover induced by trade makes the situation worse. The GDP in the US and China declines by 1.6% and 2.5%, respectively. The equivalent variation in the US and China is reduced by 199.5 billion USD and 187.1 billion USD, respectively. Again, the trade diversion is not large enough to recover losses in these countries. Third, the imposed tariffs distort relative prices, resulting in changes to the global production structure. Both the US and China lose their comparative advantage in transport, electronic, and machinery equipment production, while other countries expand their production in these sectors. Finally, China’s retaliatory tariff increases worsens the US economy to some extent, but it comes at a cost to the Chinese economy. In the long run, retaliation is not an appropriate policy response.