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

Author

Listed:
  • Bolt, Wilko
  • Mavromatis, Kostas
  • van Wijnbergen, Sweder

Abstract

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.

Suggested Citation

  • Bolt, Wilko & Mavromatis, Kostas & van Wijnbergen, Sweder, 2019. "The Global Macroeconomics of a Trade War: The EAGLE model on the US-China trade conflict," CEPR Discussion Papers 13495, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13495
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    References listed on IDEAS

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    1. Van Wijnbergen, Sweder, 1985. "Trade reform, aggregate investment and capital flight : On credibility and the value of information," Economics Letters, Elsevier, vol. 19(4), pages 369-372.
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    3. Harry G. Johnson, 1953. "Optimum Tariffs and Retaliation," Review of Economic Studies, Oxford University Press, vol. 21(2), pages 142-153.
    4. van Wijnbergen, Sweder, 1992. "Trade Reform, Policy Uncertainty, and the Current Account: A Non-Expected-Utility Approach," American Economic Review, American Economic Association, vol. 82(3), pages 626-633, June.
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    Cited by:

    1. Yong Wang & Changyang Liu & Gaoyi Wang, 2020. "Geopolitical Risk Revealed in International Investment and World Trade," Risk Management, Palgrave Macmillan, vol. 22(2), pages 133-154, June.
    2. Meinen, Philipp & Schulte, Patrick & Cigna, Simone & Steinhoff, Nils, 2019. "The impact of US tariffs against China on US imports: Evidence for trade diversion?," Discussion Papers 46/2019, Deutsche Bundesbank.

    More about this item

    Keywords

    Exchange Rates; Local Currency Pricing; trade diversion; trade policy;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F30 - International Economics - - International Finance - - - General
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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