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

Author

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  • Tsutsumi, Masahiko
Abstract
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

Suggested Citation

  • Tsutsumi, Masahiko, 2018. "The Economic Consequences of the 2018 US-China Trade Conflict: A CGE Simulation Analysis," CIS Discussion paper series 676, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:cisdps:676
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/29763/cis_dp676.pdf
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    Citations

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    Cited by:

    1. Rod Tyers & Yixiao Zhou, 2020. "US–China rivalry: The macro policy choices," The World Economy, Wiley Blackwell, vol. 43(9), pages 2286-2314, September.
    2. Yang, Shanran & Shi, Benye & Yang, Fujia, 2023. "Macroeconomic impact of the Sino–U.S. trade frictions: Based on a two-country, two-sector DSGE model," Research in International Business and Finance, Elsevier, vol. 65(C).
    3. Masahiko Tsutsumi, 2020. "Comment on “Evaluating the Impact of the US–China Trade War”," Asian Economic Policy Review, Japan Center for Economic Research, vol. 15(1), pages 94-95, January.
    4. Ken Itakura, 2020. "Evaluating the Impact of the US–China Trade War," Asian Economic Policy Review, Japan Center for Economic Research, vol. 15(1), pages 77-93, January.

    More about this item

    Keywords

    the US; China; Tariff; Trade Policy; Retaliation; CGE model;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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