DP13495 The Global Macroeconomics of a Trade War: The EAGLE model on the US-China trade conflict

Author(s): Wilko Bolt, Kostas Mavromatis, Sweder van Wijnbergen
Publication Date: January 2019
Date Revised: January 2019
Keyword(s): Exchange Rates, Local Currency Pricing, trade diversion, trade policy
JEL(s): E32, F30, H22
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13495

We study the global macroeconomic effects of tariffs using a multiregional, general equilibrium model, EAGLE, that we extend by introducing US tariffs against Chinese imports into the US, and subsequently Chinese tariffs against US imports into China, consistent with recent trade policies by the US and the Chinese governments. We abstract from tariffs on goods exported from the euro area, focusing on a US-China trade war. A unilateral tariff from the US against China dampens US exports in line with the Lerner Symmetry theorem but global output contracts. Global output contracts even further after China retaliates. The euro area benefits from this trade war. These European trade diversion benefits are caused by cheaper imports from China and improved competitiveness in the US. As price stickiness in the export sector in each region increases, the negative effects of tariffs in the US and China are mitigated, but the positive effects in the euro area are then also dampened.