Macroeconomic impact of the Sino–U.S. trade frictions: Based on a two-country, two-sector DSGE model

Abstract

To examine the impact of the recent Sino–U.S. trade frictions on the macroeconomics of China and the United States, we constructed a two-country, two-sector dynamic stochastic general equilibrium model. This model was used to explore the tariff transmission mechanism in such trade frictions and provide a basic analytical framework for future research on bilateral trade frictions. Based on our benchmark analysis, the tariff shocks affect non-tradable sectors through the tradable sectors, which, in turn, have impacted consumption, investments, prices, and production. Specifically, the tariffs on intermediate and final goods affect the economy from the supply and demand sides, respectively, and as the trade dependence decreases, the economic volatility caused by the tariff shocks also decreases. Moreover, our simulation showed that the impact of the trade frictions on the macroeconomics of the two countries has been asymmetrical, which is consistent with the objective economic realities.