4. The Day After Tomorrow: Evaluating the Burden of Trump’s Trade War

During his U.S. presidential campaign Donald Trump threatened China with the imposition of high import tariffs on its exports to the United States. To evaluate the repercussions of such an action, this paper uses Eaton and Kortum’s 2002 multi-sector, multi-country general equilibrium model with inter-sectional linkages to forecast how exports, imports, output, and real wages would change if the Trump’s threat of 45% tariffs is carried out. To view plausible scenarios, we evaluate the case of a unilateral action on the part of the United States, as well as a scenario where China retaliates by imposing an equally high 45% tariff on its imports from the United States. In addition, since the high U.S. trade deficit with China is a factor which underpins calls for tariff action, we explore simulations where the trade balance is restored to balance as well as a scenario in which the trade balance is unchanged. In all of the scenarios, the calibration exercise suggests that a trade war triggered by high U.S. import tariffs will lead to a collapse in U.S.-China bilateral trade. In all of the scenarios, the United States will experience large social welfare losses, while China may lose or gain slightly depending on the effect of trade war on the U.S.-China trade balance. Globally, some small open economies may experience small benefits, while other countries may suffer collateral damage.