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China’s Counter-Tariffs Eliminate US Advantage in Trade Dispute

Summary:
China‘s counter-tariffs eliminate the economic advantage of the US in the trade conflict, according to a recent analysis by the ifo Institute. “So far, the trade spat between the USA and China has mostly damaged Chinese economic interests. But the Chinese retaliatory tariffs on US products turn the US advantage into a loss”, says Gabriel Felbermayr, Director of the ifo Center for International Economics. “In current prices, the static economic effects of the existing American tariffs reduce Chinese GDP by about 9.3 billion euros, while the US register an economic benefit of about 3.5 billion euros, mostly because of higher tariff revenue. However, Chinese retaliation turns the American gain into a loss of about 2.6 billion euros. In contrast, Chinese retaliation

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China‘s counter-tariffs eliminate the economic advantage of the US in the trade conflict, according to a recent analysis by the ifo Institute. “So far, the trade spat between the USA and China has mostly damaged Chinese economic interests. But the Chinese retaliatory tariffs on US products turn the US advantage into a loss”, says Gabriel Felbermayr, Director of the ifo Center for International Economics. “In current prices, the static economic effects of the existing American tariffs reduce Chinese GDP by about 9.3 billion euros, while the US register an economic benefit of about 3.5 billion euros, mostly because of higher tariff revenue. However, Chinese retaliation turns the American gain into a loss of about 2.6 billion euros. In contrast, Chinese retaliation lowers the country’s loss to 5.7 billion euros. Nonetheless, Chinese GDP still shrinks about twice as much as American GDP.”

The existing tariffs increase value added in US manufacturing by approximately 0.04 percent, while agricultural value added falls by 0.48 percent due to Chinese retaliation. The services sector loses 0.04 percent of its value added due to indirect effects.

“If the US increase the existing tariffs on 250 billion dollars of imports from an average of 13 percent to 25 percent and the Chinese respond with an equivalent increase of existing tariffs, costs to China would go up to about 18 billion euros, while the damage to US GDP would grow only slightly to 4 billion euros,” Felbermayr adds. “A total trade war where the entire Sino-American goods trade was taxed by tariffs of 25 percent would raise the economic damage in China to over 30 billion Euros, while the GDP cost in the US would increase to about 9 billion euros. Value added in US manufacturing would go up by 0.56 percent relative to the pre-conflict level; however, falling value added in other sectors would more than offset this effect.”

China is more strongly affected than the US simply because of its huge bilateral trade surplus. It imports goods worth only 130 billion US-dollars, whereas the US buy goods worth 506 billion US-dollars from China (data from 2017).

The existing tariffs in the Sino-American trade conflict boost GDP in Germany and the EU very slightly by 0.3 and 0.7 billion euros, respectively. In a fully-fledged trade war, Germany could see an increase in its economic performance by about half a billion euros. These positive effects would be generated by an increase in German exports to the US and China. This analysis does not reflect the negative effects for Germany and the EU resulting from higher economic uncertainty. However, it reveals that the Sino-American trade spate alone can only explain a very small share of the recent downturn in global economic activity.

Publication

  1. Felbermayr, Gabriel and Marina Steininger, The trade dispute between the US and China – Who wins? Who loses?, ifo Institut, München, 2018, 01–06 | Details | PDF Download

Clemens Fuest
Clemens Fuest took over from Hans Werner Sinn as chairman of the IFO Institute in April 2016. He is professor at the Faculty of Economics of the University of Munich.

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