Expert Commentary

US-China trade war: global consequences edition

These studies show that the trade war is a net loss for the world economy. And if a global trade war broke out, the economic hit could approach that seen during the Great Recession.

(Sergio Souza/Unsplash)

The U.S.-China trade war is well over a year on and U.S.-imposed tariffs now cover hundreds of billions of dollars’ worth of goods from China. President Donald Trump continues to fire trade missives via Twitter while the tariff tit-for-tat plays out. August has seen nervous stop-and-go trading on Wall Street, and a few weeks ago the yuan-to-dollar exchange rate crossed the ‘psychologically important’ threshold of 7-to-1 in response to tariff woes.

By the end of the year an additional $300 billion worth of goods coming into the U.S. from China will be taxed at 15%, Trump announced on Aug. 23. Combined with an October 1 tariff increase from 25% to 30% on $250 billion worth of other goods, nearly all U.S. imports from China will have a tariff penalty by 2020 — while U.S. cars going into China will face a 25% tariff by mid-December.

We previously explored how domestic consumers are footing the bill for the trade war between the world’s two largest economies. Now, we’re running down recent research on how U.S. tariff policy could affect the global economy. These studies and research-based commentaries indicate that the trade war is a net economic loss for the world. And while certain countries and industries may benefit from the U.S.-China trade war, if a global trade war broke out the economic hit could approach that seen during the Great Recession, according to one analysis.

Trade Wars: What do They Mean? Why are they Happening Now?

Aaditya Mattoo and Robert W. Staiger. National Bureau of Economic Research. April 2019.

Mattoo and Staiger explore the idea that the U.S. imposed tariffs on trading partners to get those partners to lower their own tariffs on U.S. goods, an interpretation that they write is, “at once more charitable and less forgiving.”

U.S. Commerce Secretary Wilbur Ross described this tactic in a letter to the Wall Street Journal in 2017:

“An ideal global trading system would facilitate adoption of the lowest possible level of tariffs. In this ideal system, countries with the lowest tariffs would apply reciprocal tariffs to those with the highest and then automatically lower that reciprocal tariff as the other country lowers theirs. This leveling technique could be applied product by product or across the board on an aggregated basis. Such a modification would motivate high-tariff countries to reduce their tariffs on imports.”

Tariffs imposed for negotiating purposes essentially upend the global trading system established by the World Trade Organization, according to Mattoo and Staiger. Global trade works on the idea that similar goods produced in different countries should be subject to the same economic treatment — for example, when it comes to tariffs imposed. The idea is to make it easy for major global economic players to trade not just with one another, but across many countries.

There is a certain logic to recent U.S. tariff actions, according to Mattoo and Staiger. They offer that U.S. tariff activity has to do with the rise of China as a global economic player. And, that the U.S. is relatively less important on the global economic stage than it was, say, in the decades after the Cold War when America was arguably the world’s sole economic superpower.

Even if there is a logic to hiking tariffs on trading partners, Mattoo and Staiger take the view that using tariffs as a bargaining ploy is short-sighted. They explain that other countries could follow suit, wiping out any tariff successes the U.S. might have gained. In pursuing a new world order in which the most dominant nation flouts trade norms, the U.S. may be creating a system where America could suffer if — or when — a new economic superpower rises.

“The main costs will arise from the use of the tactics themselves, and from the damage done by those tactics to the rules-based multilateral trading system and the longer-term interests of the United States and the rest of the world,” Mattoo and Staiger write.

Potential Economic Effects of a Global Trade Conflict

Eddy Bekkers and Robert Teh. 22nd Annual Conference on Global Economic Analysis. 2019.

This paper, presented at a global economic conference, explores what might happen if a new global trade order did arise, and countries more widely and readily engaged in economic protectionism through high tariffs. What if the trade war weren’t just between the U.S. and China? What if the trade war spanned the entire global economy?

Economists Bekkers and Teh use a World Trade Organization simulation model based on real data to predict how economies would react to an all-out global trade war where trade cooperation crumbles. A global trade war that broke out in 2019 would lead to a decline in global gross domestic product of nearly 2% — about $1.75 trillion — and a 17% drop in the value of exports by 2022. Real income would fall 2.25%, according to their analysis.

“For context global GDP fell about 2.1% and global trade 12.4% in the global financial crisis of 2009,” the Bekkers and Teh write.

One big caveat the authors acknowledge: the real world is messier than an economic simulation. Political actors in the real world may not, for example, “follow rational rules in determining the size of tariff increases across sectors,” they write.

Emerging Countries and the Effects of the Trade War between US and China

Monique Carvalho, André Azevedo and Angélica Massuquetti. Economies. June 2019.

The world as a whole loses economically as a result of the U.S.-China trade war, but certain countries may gain, according to this analysis from economists Carvalho, Azevedo and Massuquetti.

The authors use economic simulations to explore two scenarios: one that only accounts for tariffs imposed by the U.S. and another that accounts for retaliation from China. They consider the across-the-board steel and aluminum tariffs the U.S. imposed in March 2018 along with $50 billion in tariffs imposed on products from China in April 2018. And they find a reduction of the U.S.-China trade deficit and an increase in U.S. steel and aluminum production — though the tariffs included in this simulation represent a fraction of the total tariffs now imposed on goods from China.

Retaliatory tariffs on American soybeans, however, could economically benefit other soybean-producing countries like Argentina and Brazil, according to this analysis. The authors find that, “some sectors in emerging countries, not directly involved in the trade war, could benefit by the shift in demand, despite the overall losses in terms of welfare for the U.S. and China and for the world as a whole.”

Why the US–China Trade War Spells Disaster for the Amazon

Richard Fuchs, et. al. Nature. March 2019

Indeed, following a 25% tariff on U.S. soybeans in 2018, China bought half as many tons of U.S. soybeans in 2018 as in 2017. Other countries including Brazil may benefit economically from more soybean demand from China — to the tune of nearly 38 million tons, Fuchs and his co-authors write in this commentary. That would mean money in the pockets of Brazilian farmers, but the Amazon rainforest might pay the ultimate price. China’s demand for Brazilian soybeans could reach an additional 17 million tons yearly if the relative percentage of soy that Brazil provides holds at current levels, according to the authors’ analysis.

Producing that much more soy would take much more land. Agriculture is critical to Brazil’s economy, and it is unlikely that land used for other major crops like maize and sugar cane would be repurposed for soybeans, the authors explain. The area that farmers in Brazil use for soybean production could increase 39% — 13 million hectares, or about 32 million acres – to satisfy demand from China, the authors estimate. 1995 and 2004 were the two years with the most Amazon deforestation. 3 million hectares were cleared those years, according to the authors.

“Massive deforestation of the Amazon over what’s already happening will have profound impacts on global attempts to mitigate climate change and protect biodiversity,” Fuchs and his co-authors conclude.

There have been about 75,000 forest fires so far this year in Brazil, nearly double the number recorded last year. Brazilian President Jair Bolsonaro’s administration is essentially is looking the other way, emboldening farmers — including soybean farmers — to set fires and clear land for agriculture, according to a recent report from the Pulitzer Center and Rolling Stone.

Shooting Oneself in the Foot? Trade War and Global Value Chains

Cecilia Bellora and Lionel Fontagné. 22nd Annual Conference on Global Economic Analysis. 2019.

Bellora and Fontagné estimate the economic consequences of the U.S.-China trade war using a model that projects GDP for countries out to 2030. In this paper presented at a global economic conference, they find that U.S. imports shift largely to the benefit of Mexico, countries in the European Union and Canada. Oilseeds (like soybeans) in the U.S. see their value added drop 10.5% while fiber crops (like cotton) lose 7.1%. Steel and iron industries see a 10.7% rise in value added.

Looking at tariff policies that were in place in January 2019, Bellora and Fontagné estimate that China could experience a 0.4% loss in GDP while the U.S. could see a 0.3% GDP loss due to the trade war. These are economic modelling estimates — like previous papers detailed here, these models don’t account for political whims or global economic recession or anything else that might happen outside the simulation, but they demonstrate that trade wars are “costly for all trading partners jointly involved in global value chains,” the authors write.

“By entering into a trade war, the U.S. administration reached its goal to weaken the Chinese economy, but this comes at a cost for the U.S. economy itself,” the authors write.

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