A Trade War between China and the United States and Its Likely Economic Impacts

Abstract

This paper aims to quantify the likely economic effects of a trade war between China and the United States using a global computable general equilibrium (CGE) model. Three scenarios on a trade war between China and the United States are assumed in this study. Scenario 1 is a case in which the United States imposes 25% tariffs on $34 billion worth of Chinese goods and China reciprocates with 25% retaliatory tariffs on $34 billion worth of U.S. goods. Scenario 2 is a combination of Scenario 1 with a case in which the United States imposes 25% tariffs on additional $15 billion worth of Chinese goods and China responds with 25% retaliatory tariffs on additional $15 billion worth of U.S. goods. Scenario 3 is a combination of Scenario 2 with a case in which the United States imposes 10% tariffs on additional $200 billion worth of Chinese goods and China responds with 10% retaliatory tariffs on additional $140 billion worth of U.S. goods. The simulation results of the three scenarios are presented in terms of real GDP, equivalent variation (EV) as a measure of welfare, bilateral trade values, and trade balance of all countries in this study. Although the United States and China are predicted to run a trade surplus as a result of the trade war, they would have to pay for the trade war in terms of a lower economic growth and welfare. This is because the United States and China would not be able to use the lower-priced imported intermediate inputs from each other to produce exports.