A model of the Euro area, China, and the United States: Trade links and trade wars

Abstract

This study develops a dynamic stochastic general equilibrium model featuring the euro area, the United States and China. The countries in the model are linked through trade and international bond purchases. Having estimated the model, we study several scenarios of trade wars between the countries. Our findings suggest that no country benefits from imposing tariffs in the long run. Moreover, in terms of welfare, a country loses less if it does not impose retaliatory tariffs. The degree to which tariffs hurt a particular country depends on the strength of its import and export links, whereas a nontrivial interaction exists between tariffs and monetary policy.