Globally chained economies, unwitting victims of the US‐China trade war

Abstract

The USA and China have been engaged in a trade war since 2018—an economic tussle that has had repercussions for not only the two countries directly involved but also for their trading partners participating in the industrial global value chains (GVC). To assess the gravity of the dispute, we measure the impacts of the US‐China bilateral tariff hikes on the participants, as well on their trading partners linked by global supply chains, whose structure is estimated using the OECD Inter‐Country Input–Output Model. Our assessment relies on two metrics: the effective rate of protection (ERP) and total factor productivity (TFP). We calculate ERPs following a methodology that reflects the globally fragmented production linkages. From our assessments, the tariff increases raised the ERPs of the warring countries but lowered those of their trading partners. Moreover, the bilateral tariff hikes significantly raised the input tariffs of many major trading partners through the transmission of GVCs. Consequently, the TFPs of the major trading countries are likely to fall by 0.16 to 0.41 per cent.