US-China Trade War: Is Winter Coming for Global Trade?

Abstract

This paper uses the SMART Model to analyze the direct economic effects of the US-China tariff war on both China and the US. Based on the three lists of Chinese products subject to additional tariffs imposed under the US Section 301 investigation throughout 2018 and the tariff lists issued by China as a countermeasure, we simulate the trade creation/reduction effects, welfare effects, and trade diversion effects at the detailed product level. According to the simulation results, US imports from China and Chinese imports from the US will be greatly reduced by an estimated $91.46 and $36.71 billion, respectively. US imports will be diverted from China to other markets, specifically, Mexico, Japan and Germany, in most sectors. Chinese imports from the US will be mainly diverted to Brazil, Germany, Japan, Argentina, the United Kingdom and Canada. However, trade between the US and China cannot be completely transferred to alternative suppliers in other countries without additional costs or a loss of utility, which results in a substantial reduction in the total imports and welfare in both the US and China. The sectors with the highest welfare loss in the US are machinery and electrical products. In China, soybeans and automobiles are the most affected sectors and exhibit much higher welfare loss than other sectors. The trade war harms both sides’ welfare and could have further adverse effects on global value chains and the multilateral trading system.