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US trade wars with emerging countries in the 21st century: Make America and Its partners lose again

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  • Bouët, Antoine
  • Laborde Debucquet, David

Abstract

In a context of rising protectionist rhetoric, this paper looks at the potential impact of trade wars initiated by a change in US trade policies. We show that such trade wars can hurt emerging countries and damage the global trading system without bringing gains for the United States. We use a static multicountry, multisector Armington trade model to evaluate 6 modalities of 3 potential trade wars—for a total of 18 scenarios—between the United States and China, between the United States and Mexico, and between the United States and both China and Mexico. We also determine and analyze the optimal noncooperative unilateral tariff that the US government can implement against all of its trading partners. In each case, we evaluate various forms of trade retaliation by the trading partner(s): the same level of import duty as the one imposed by the United States, a duty that minimizes welfare loss, a duty that minimizes terms-of-trade deterioration, a duty that generates the same amount of collected revenue, and finally, a Nash equilibrium. We conclude that there is no scenario in which the US government augments its domestic welfare or gross domestic product. There may be sectoral gains in value-added in the United States, but they are small and to the detriment of other sectors. Although losses for China are relatively small, potential losses for the Mexican economy are significant. There are also potential free riders of these trade wars, particularly in Central America. Finally, the way in which trade retaliations are designed matters greatly.

Suggested Citation

  • Bouët, Antoine & Laborde Debucquet, David, 2017. "US trade wars with emerging countries in the 21st century: Make America and Its partners lose again," IFPRI discussion papers 1669, International Food Policy Research Institute (IFPRI).
  • Handle: RePEc:fpr:ifprid:1669
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    References listed on IDEAS

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    1. BOUET, ANTOINE & Laborde, David, 2010. "Assessing the potential cost of a failed Doha Round," World Trade Review, Cambridge University Press, vol. 9(2), pages 319-351, April.
    2. Grossman, Gene M & Helpman, Elhanan, 1995. "Trade Wars and Trade Talks," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 675-708, August.
    3. Kuga, Kiyoshi, 1973. "Tariff retaliation and policy equilibrium," Journal of International Economics, Elsevier, vol. 3(4), pages 351-366, November.
    4. Edward Tower, 1975. "The Optimum Quota and Retaliation," Review of Economic Studies, Oxford University Press, vol. 42(4), pages 623-630.
    5. Ralph Ossa, 2014. "Trade Wars and Trade Talks with Data," American Economic Review, American Economic Association, vol. 104(12), pages 4104-4146, December.
    6. Hamilton, Bob & Whalley, John, 1983. "Optimal tariff calculations in alternative trade models and some possible implications for current world trading arrangements," Journal of International Economics, Elsevier, vol. 15(3-4), pages 323-348, November.
    7. Rodriguez, Carlos Alfredo, 1974. "The non-equivalence of tariffs and quotas under retaliation," Journal of International Economics, Elsevier, vol. 4(3), pages 295-298, August.
    8. Douglas A. Irwin, 1998. "The Smoot-Hawley Tariff: A Quantitative Assessment," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 326-334, May.
    9. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-258, March.
    10. D. J. Horwell, 1966. "Optimum Tariffs and Tariff Policy," Review of Economic Studies, Oxford University Press, vol. 33(2), pages 147-158.
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