An Economic Analysis of the US-China Trade Conflict

Abstract

This paper provides an economic analysis of the trade conflict between the US and China, providing an overview of the tariff increases, a discussion of the background of the trade conflict, and an analysis of the economic effects of the trade conflict, based both on empirics (ex post analysis) and on simulations (ex ante analysis). Bilateral tariffs have increased on average to 17% between the US and China, and the Phase One Agreement signed in January 2020 between the two countries only leads to minor reductions in the tariffs to 16%. The trade conflict has led to a sizeable reduction in trade between the US and China in 2019 and is accompanied by considerable trade diversion to imports from other regions, leading to a reorganization of value chains in (East) Asia. The simulation analysis shows that the direct effects of the tariff increases on the global economy are limited (0.1% reduction in global GDP). The impact of the Phase One Agreement on the global economy is even smaller, although the US is projected to turn real income losses into real income gains because of the Chinese commitments to buy additional US goods. The biggest impact of the trade conflict is provoked by rising uncertainty about trade policy and the paper provides a framework to analyze the uncertainty effects.