US international trade policy: Scenarios of protectionism and trade wars

Abstract

US international trade policy under both the Trump and Biden administrations has been increasingly protectionist. This paper considers two policy scenarios under active discussion: (1) an across-the-board increase in all US tariffs by 10 % points, and (2) a severe escalation of the US trade war with China. The scenarios are analyzed using a multi-country computable general equilibrium (CGE) simulation model of the global economy. Trade wars or policy regimes of widespread protection will increase tariffs in many sectors simultaneously and include both final goods and intermediate inputs. The impacts are complex, with a web of direct and indirect forces coming into play across domestic and international markets. The global CGE model captures these mechanisms, including both short and long-run effects, with and without retaliation by partner countries. In a world economy where the US accounts for only 10 % of global trade and potentially rival trading blocs have emerged in Europe and E&SE Asia, the US is no longer hegemonic in global markets. We find that across-the-board tariffs do not protect manufacturing jobs because the cost of imported intermediate goods increases, raising costs in manufacturing production. The US trade war with China leads to a dramatic fall in bilateral trade. Other countries expand their trade to China and the US with the exception of closely linked partners (e.g. Canada and Mexico and all countries in E&SE Asia). We find that the world economy can adjust to US trade wars, diverting trade around the US.