Who’s Winning the US-China Trade War? It’s Not the United States or China

The US-China trade war will leave both countries worse off in coming years, according to an analysis of current and threatened trade scenarios that is based on a global simulation model of the world economy.

The model employed here assumes that US tariffs will raise prices for American consumers and for producers who import intermediate inputs from China, and that Chinese tariffs will disrupt the supply chains of US exporters and producers. Several studies and news reports indicate that these effects are already happening for American consumers and businesses.

The model projects that in the next three to five years and beyond, US and Chinese industries will adjust, diverting trade to other markets, and other countries will divert exports to US and Chinese markets to fill the void. US agriculture and manufacturing will lose, while Chinese manufacturing will gain, expanding production and trade.

In terms of aggregate welfare, which is measured by the total of all goods and services available in the economy (also known as “aggregate final demand”), both countries lose, although the magnitudes of the losses are small.

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By contrast, the “winners” are all other countries that benefit from shifts in markets and world prices. In addition, the analysis indicates that imposing more tariffs on China, as President Donald Trump has threatened, would exacerbate all these effects.

These main conclusions do not account for several factors that could worsen the outlook for the United States in particular. There could be shocks to various asset markets, for example, as well as increased uncertainty that suppresses investment on all sides. In addition, China has lowered tariffs on imports from countries other than the United States, a step that could inflict more harm on US exports than this model shows.