NS3040 Fall Term 2018 U.S. China Trade War Daniel Gros, Who Wins in Trump’s Trade War? Project Syndicate, October 9, 2018

Overview U.S. and China appear set for protracted trade war Old adage “When two quarrel, the third rejoices” is very relevant today. Until recently trade policy overwhelmingly liberalized From 1960s to 1990s process driven primarily by generalized reductions in tariffs under General Agreement on Tariffs and Trade (GATT) and Successor – the World Trade Organization (WTO) Most recent WTO attempt at tariff reduction – so called Doha Round never completed India, not China refused to open up some key markets

Regional Agreements In absence of WTO action regional trade-agreements helped somewhat maintain liberalization momentum Economists usually skeptical of regional agreements because of their trade diversion effects Instead of spurring increased trade overall reginal agreements may cause Trade increases among participating countries to their benefit but Declines for third parties

Trade War Effects I This suggests that if a group of major trading countries does opposite Increasing tariffs only for one another – third parties should benefit With the U.S. imposing higher tariffs on Chinese goods, European producers will enjoy a competitive advantage over Chinese producers in US market Similarly in Chinese market, both European and Asian producers will have a competitive advantage over US producers.

Trade War Effects II A substantial share of US-China trade likely to be diverted to Europe Japan and Other Asian economies close to the Chinese market EU is likely to be big winner because It remains one of the largest trading partners of both US and China European producers are often US companies’ closest competitors.

Trade War Effects III Trade shifts likely to be large because The two economies previously rather open and Are imposing substantial trade barriers. Already US is imposing at 10% tariff– four times the U.S. average on more than $200 billion Chinese goods Next year Tariff may be raised to 25% (ten times the US average tariff on imports from other countries Expanded to include a broader range of imports Implies trade diversion could be substantial

Trade War Effects IV The transatlantic economy’s high degree of integration could act as mitigating factor Airbus might displace Boeing in the Chinese market but more than 1/3 value added in Airbus contributed by US However, ultimately seems likely the Sino-American confrontation Will shift global trade significantly May benefit most of world’s economies Will have serious consequences for the US and China where enterprises will have to pay more for imported machinery

Trade War Effects V Losses likely to be higher for US than China because Chinese imports from US include larger share of agricultural commodities for which alternatives are relatively easy to find China can import soybeans from Brazil instead of US at little additional cost Chinese countervailing measures have been more moderate – little prospect of a blanket 25% tariff on US imports All in all trade war may lead to some losses for China but will be dwarfed by the costs incurred by the US itself