The United States stands to lose in a trade war, while China may benefit initially, a research report by the European Central Bank showed on Wednesday.
ECB researchers Allan Gloe Dizioli and Björn van Roye studied a scenario in which the US hikes tariffs on all imports by 10 percentage points and its trading partners retaliate with a similar size tariff increase on their US imports.
“This scenario design suggests significant negative effects on the United States,” the report said.
“Estimation results suggest that the United States’ net export position would deteriorate substantially.”
The report said gradual adjustment and substitution towards domestic production would provide only limited compensation over time, and the direct trade effects of higher tariffs suggest that GDP will be 1 percent lower by the third year of the simulation.
“By contrast, in China the trade effect on GDP is initially slightly positive, although the gains diminish over time,” the ECB report said.
The negative impact of falling domestic consumption and investment in China would be more than offset by gains in the country’s net export position.
China can compensate for the reduction in exports to the US by diverting them to third countries, where its exporters can gain market share at the expense of their US peers.
“However, over time these benefits diminish: as US production adjusts in response to higher tariffs, demand for Chinese goods falls and Chinese GDP gains diminish,” the ECB researchers said.
“Qualitatively the results are unambiguous: an economy imposing a tariff which prompts retaliation by other countries is clearly worse off. Its living standards fall and jobs are lost,” they concluded.