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The Day After Tomorrow: Evaluating the Burden of Trump's Trade War


E2017003                                                                                   2017-04-06

Meixin Guo,  Tsinghua University,

Lin Lu, Tsinghua University,

Liugang Sheng, The Chinese University of Hong Kong,

Miaojie Yu, Corresponding author. CCER, NSD, Peking University,


President Trump of the United States threats to impose high import tariffs against China’s exports during his presidential campaign. This paper evaluates the possible impact on the world economy if President Trump eventually pulls the trigger of trade war against China or the rest of the world. Based on the multi-sector and multi-country general equilibrium Eaton and Kortum (2002) model with inter-sectional linkage, we examine the changes of exports, imports, output, and real wage in 62 major economies in response to American 45% tariffs against imports from China or the rest of the world. By exploring four scenarios in which China and other countries choose to retaliate or not, our calibration results suggest that in all scenarios the high US import tariff will bring a catastrophe to international trade. But in terms of social welfare, China will be barely negatively affected whereas the USA is one of the largest losers. In addition, some small open economies may slightly gain while other may be collateral damage.

Key Words: Tariffs, Gains from Trade, Protectionism

JEL Classifications: F10, F11

Download the full text E2017003.pdf