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The Global Macroeconomics of a Trade War: The EAGLE model on the US-China trade conflict

Author

Listed:
  • Wilko Bolt

    (The Nederlandsche Bank, Vrije Universiteit)

  • Kostas Mavromatis

    (The Nederlandsche Bank, University of Amsterdam)

  • Sweder van Wijnbergen

    (The Nederlandsche Bank, University of Amsterdam)

Abstract

We study the global macroeconomic effects of tariffs using a multiregional, general equilibrium model, EAGLE, that we extend by introducing US tariffs against Chinese imports into the US, and subsequently Chinese tariffs against US imports into China, consistent with recent trade policies by the US and the Chinese governments. We abstract from tariffs on goods exported from the euro area, focusing on a US-China trade war. A unilateral tariff from the US against China dampens US exports in line with the Lerner Symmetry theorem but global output contracts. Global output contracts even further after China retaliates. The euro area benefits from this trade war. These European trade diversion benefits are caused by cheaper imports from China and improved competitiveness in the US. As price stickiness in the export sector in each region increases, the negative effects of tariffs in the US and China are mitigated, but the positive effects in the euro area are then also dampened.

Suggested Citation

  • Wilko Bolt & Kostas Mavromatis & Sweder van Wijnbergen, "undated". "The Global Macroeconomics of a Trade War: The EAGLE model on the US-China trade conflict," Tinbergen Institute Discussion Papers 19-015/VIII, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20190015
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    Keywords

    Trade Policy; Exchange Rates; Trade Diversion; Local Currency Pricing;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F30 - International Economics - - International Finance - - - General
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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