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

Abstract

The aim of the paper is to examine the effects of the US–China trade war on both countries and some emerging economies. Two scenarios are examined, one where only US protectionist measures are considered, and another in which Chinese retaliation is taken into account, using the GTAP (Global Trade Analysis Project) Computable General Equilibrium model. The results showed that, on one hand, the trade war would lead to a reduction in US trade deficit and an increase in domestic production of those sectors affected by higher import tariffs and Chinese producers and consumers would bear the lion’s share of the burden of the trade war. But, on the other hand, both countries and the world as a whole would lose in terms of welfare, due to the significant reduction in allocative efficiency, especially in the US, and the loss of terms of trade in the Chinese case. With the increase in protectionism between the two largest global economies, some important emerging countries, not directly involved in the trade war, would benefit by the shift in demand to sectors where they have comparative advantages.