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

2. 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

3. 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

4. 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.

5. 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.

6. 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

7. 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

8. 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