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The current trade war between the US and China is likely to weigh heavily on the US economy in particular. Inflation is likely to rise by over 5 percent and exports are likely to slump by almost 17 percent. The consequences for China itself are also considerable, but much less severe. Germany and the EU are hardly affected negatively. China's Asian neighbors and products such as Christmas decorations, dried fish, and electric blankets will face substantial additional competition on the global market. This is shown by simulations using the KITE model (https://www.ifw-kiel.de/institute/research-centers/trade/trade-policy/kite-kiel-...) (...)
(...) of the Kiel Institute for the World Economy.
The simulations (The consequences of the Trump trade war for Europe: https://www.ifw-kiel.de/publications/the-consequences-of-the-trump-trade-war-for...) are based on the current US tariff regime of 145 percent on all Chinese imports, the counter-tariffs imposed by China of 125 percent on US imports, and a general tariff of an additional 10 percent on almost all US imports.
The result would be a slump in trade between the US and China of almost 50 percent within a year. In the longer term, a decline of more than 70 percent is even conceivable.
Rising prices for US consumers
In the short term within a year the increased trade barriers on inputs and final products would drive prices in the US up by a significant 5.5 percent. US producers would offer many goods that were originally intended for export at home, meaning that US exports are likely to fall by almost 17 percent. The trade war would reduce US economic output by 1.6 percent.
"By increasing trade barriers towards the global market and without access to low-cost suppliers, the US is primarily harming itself because the advantages of the international division of labor are lost," says Julian Hinz (https://www.ifw-kiel.de/experts/julian-hinz/), Research Director for Trade Policy (https://www.ifw-kiel.de/institute/research-centers/trade/trade-policy/) at the Kiel Institute for the World Economy.
China itself would be significantly less affected, with exports likely to fall by 4.75 percent and economic output by 0.7 percent. Domestic prices are likely to fall by 2.7 percent because products destined for export will cause increased domestic competition.
Trade war causes global damage, but EU hardly affected
Globally, the trade war between the two largest economies is leaving its mark. Global production falls by 0.75 percent and prices rise by 0.7 percent.
The costs for the EU and its member states, on the other hand, are manageable and would have little to no short-term negative impact. This is because the US tariff regime applies to essentially all countries worldwide, meaning that the EU and Germany would not experience any particular disadvantages.
The effects will be most noticeable for Germany due to its strongly export-oriented economy. Exports are likely to fall by just under 0.2 percent and economic output by about 0.2 percent. Prices are likely to fall by about 0.3 percent, again primarily because products destined for the global market are being offered domestically.
"Import glut" of Chinese goods: no competition for Germany
The fear of a "glut" of Chinese goods, which were previously exported to the US and now represent additional competition for German and European exporters on the global market, is unfounded according to the simulation.
On the one hand, the majority of goods is now likely to be offered in China itself. On the other hand, automotives, steel, and chemicals play a particularly important role for European and German exporters. However, China has exported very little to the US in these segments to date, barely five percent of the global trade volume.
Countries such as Vietnam, Cambodia, and Bangladesh, which produce decorative items and textiles and are therefore in direct competition with China on the global market, tend to suffer from a "glut" of Chinese products.
"Trade means prosperity. The EU must therefore now position itself as a reliable and open trading partner and must not allow itself to be drawn into a global spiral of protectionism," says Hinz.
The Kiel Institute for the World Economy will continue to follow developments with current figures and analyses on the Kiel Trade and Tariffs Monitor (https://www.ifw-kiel.de/topics/kiel-trade-and-tariffs-monitor/).
Read the Kiel Policy Brief now: "The consequences of the Trump trade war for Europe" (https://www.ifw-kiel.de/publications/the-consequences-of-the-trump-trade-war-for...)
Media Contact:
Mathias Rauck
Chief Communications Officer
T +49 431 8814-411
mathias.rauck@ifw-kiel.de
Prof. Dr. Moritz Schularick
President
T +49 431 8814-259
president@ifw-kiel.de
Prof. Dr. Julian Hinz
Director Trade Policy
T +49 431 8814-507
julian.hinz@ifw-kiel.de
Short-run changes in total exports (nominal, in %)
Short-run changes in real production (in %)
Short-run changes in price index (in %)
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Short-run changes in total exports (nominal, in %)
Short-run changes in real production (in %)
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