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

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  • Gabriel Felbermayr
  • 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.

Suggested Citation

  • Gabriel Felbermayr & Marina Steininger, 2019. "Trump’s trade attack on China – who laughs last?," EconPol Policy Brief 13, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
  • Handle: RePEc:ces:econpb:_13
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    References listed on IDEAS

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    1. Dizioli, Allan Gloe & van Roye, Björn, 2018. "Macroeconomic implications of increasing protectionism," Economic Bulletin Boxes, European Central Bank, vol. 6.
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    3. Gabriel Felbermayr & Rahel Aichele & Inga Heiland, 2016. "Going Deep: The Trade and Welfare Effects of TTIP Revised," ifo Working Paper Series 219, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    4. Lorenzo Caliendo & Fernando Parro, 2015. "Estimates of the Trade and Welfare Effects of NAFTA," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(1), pages 1-44.
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