Chapter 12. Economic Sanctions and Free Trade 361
12.11 A Trade War is Not Good for Anyone
The simulation results of a local trade friction between China and the U.S. or a trade war indicate the following:
First, in both a small-scale trade friction and a full-scale trade war between China and the U.S., both countries increasing the import tariffs on each other’s products will reduce China’s trade surplus and the U.S. trade deficit slightly but will not significantly reverse the basic patterns of China’s trade surplus and the U.S. trade deficit.
Mexico will gain the most in a trade war between China and the U.S., and East Asian and South Asian countries may suffer losses.
FromTradeSurplustotheDisputeovertheExchangeRate9inx6inb2268-ch12page414
TradeSurplustotheDisputeovertheExchangeRate
2007A 2007B 2007C 2007A 2007B 2007C 2007A 2007B 2007C
Australia, New Zealand −0.01 −0.03 −0.05 0.00 0.01 0.01 −0.02 0.02 0.17
Brazil 0.14 0.12 0.41 0.01 0.01 0.03 0.13 0.27 0.92
Canada 0.20 0.19 0.64 0.01 0.02 0.06 0.34 0.6 1.73
China −0.44 −0.82 −2.09 −0.12 −0.20 −0.77 −0.56 −1.47 −3.76
12 EU Countries 0.04 −0.02 −0.05 0.00 0.01 0.02 0.09 0.06 0.22
15 EU Countries 0.09 0.01 0.04 0.01 0.01 0.03 0.19 0.14 0.45
Hong Kong −0.04 −0.15 −0.29 0.01 0.02 0.05 −0.12 −0.23 −0.46
Indonesia 0.04 0.13 0.42 0.00 0.01 0.02 −0.02 0.25 1.02
India 0.03 0.07 0.22 0.00 0.02 0.07 0.03 0.25 0.89
Japan 0.16 0.03 0.07 0.00 0.01 0.02 0.23 0.06 0.19
South Korea 0.10 0.00 0.02 0.00 0.02 0.05 0.14 0.03 0.13
Mexico 0.36 1.85 5.59 0.05 −0.42 −1.21 0.47 2.06 6.39
Malaysia 0.08 0.65 2.02 0.00 0.02 0.05 0.04 0.41 1.36
The Philippines 0.10 −0.02 0.02 0.00 0.00 0.00 0.05 0.03 0.25
Central America 0.03 0.04 0.19 0.01 0.02 0.05 0.02 0.24 0.79
EFTA Countries 0.00 −0.06 −0.13 0.00 0.01 0.02 0.11 0.08 0.27 Other Countries in the World 0.02 0.01 0.04 0.00 0.01 0.03 0.02 0.07 0.29
Russia 0.01 −0.01 −0.02 0.00 0.01 0.02 0.03 0.03 0.17
Singapore 0.07 0.12 0.42 0.02 0.03 0.09 0.12 0.14 0.46
Other South Asian Countries 0.02 0.30 0.87 0.00 0.02 0.06 −0.04 0.49 1.53
Thailand 0.04 0.36 1.23 0.00 0.00 −0.01 0.01 0.29 1.08
Taiwan 0.00 −0.10 −0.18 0.00 0.01 0.02 0.04 −0.06 −0.01
The U.S. −0.44 −0.50 −1.57 −0.10 −0.07 −0.54 −0.1 0.18 0.13
Vietnam 0.07 1.08 3.70 0.00 0.13 0.44 0.03 0.98 3.57
Other Southeast Countries 0.05 0.25 0.70 0.00 0.00 0.01 −0.03 0.35 1.15
South Africa 0.00 0.02 0.11 0.01 0.01 0.02 0.03 0.06 0.25
Source: Simulation results of GEMPACK.
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Table 12.10: Impact of a trade war between China and the U.S. on the economic growth rates of different countries (%).
2007A 2007B 2007C Australia, New Zealand −0.01 0.03 0.19
Brazil 0.14 0.28 0.95
Canada 0.35 0.62 1.79
China −0.69 −1.67 −4.51
12 EU Countries 0.10 0.07 0.25
15 EU Countries 0.19 0.15 0.48
Hong Kong −0.12 −0.21 −0.42
Indonesia −0.02 0.26 1.04
India 0.03 0.27 0.95
Japan 0.23 0.07 0.20
South Korea 0.15 0.04 0.18
Mexico 0.52 1.64 5.10
Malaysia 0.04 0.43 1.41
The Philippines 0.05 0.03 0.24
Central America 0.03 0.25 0.85
EFTA Countries 0.11 0.09 0.29
Other Countries in the World 0.02 0.08 0.32
Russia 0.03 0.04 0.19
Singapore 0.14 0.17 0.55
Other South Asian Countries −0.04 0.51 1.59
Thailand 0.01 0.29 1.07
Taiwan 0.04 −0.05 0.01
The U.S. −0.20 0.12 −0.42
Vietnam 0.03 1.11 4.03
Other Southeast Countries −0.03 0.35 1.16
South Africa 0.04 0.07 0.27
Source: Simulation results of GEMPACK.
Second, if a local trade friction breaks out between China and the U.S. on steel wheel products, the exports of China’s automobile and auto parts and mechanical equipment manufacturing industries will be seriously affected. The trade deficits of these two industries will increase significantly. If China and the U.S. increase import tariffs on all products of the other side, China’s textile and wood manufac- turing industries and the U.S. agricultural product department will be the most seriously affected. Regardless of its extent, a trade war will damage both sides.
416 From Trade Surplus to the Dispute over the Exchange Rate
Table 12.11: Impact of a trade war on the labor demands of China and the U.S. (%).
2007A 2007B 2007C
Unskilled Skilled Unskilled Skilled Unskilled Skilled
labor labor labor labor labor labor
Percentage Change (%)
China 0.02 0.07 −0.01 −0.36 −0.05 −3.28
The U.S. −0.006 −0.003 −0.002 −0.001 −0.01 −0.01 Absolute value change (10000)
China 21.1 −89.9 −241.9
The U.S. −0.9 −0.3 −1.5
Source: Simulation results of GEMPACK.
Third, a trade war between China and the U.S. will cause the total imports and exports in the world to decrease in varying degrees. On one hand, it will reduce product supply and improve the relative price of tradable goods. On the other hand, a reduction in U.S. final consumption demand and China’s intermediate input demand will directly affect world production as well as world economic recovery after the crisis.
Fourth, as measured by the physical output, both trade friction and a full-scale trade war between China and the U.S. will adversely affect the domestic investments and production of both countries. Relative to those of the U.S., China’s investment and domestic production will be more seriously affected. An additional 10% tariffs imposed by China and the U.S. on each other’s products will cause an impact of
−0.82% on China’s investment level. The GDP calculated based on the physical output will similarly be reduced by about 0.2%. When a trade war develops and punitive tariffs of 100% are imposed, China’s investment and production will fall by 2% and 0.8%, respectively. As the trade war increases the current domestic supply while reducing China’s export demand, its domestic price level will fall by 1.47%–
3.76%. At the same time, as the U.S. imports a large number of necessities from China, after the reduction of its demand on products
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made in China, it will import them from other countries at a higher price, thus increasing domestic prices by about 0.13%–0.18%.
Fifth, a trade war will affect the demand for labor. Decreasing foreign demand will reduce domestic production and thus affect the demand for labor of China’s tradable department. Simulation results show that, in the worst case (punitive tariff of 100%), China will lose about 2.42 million jobs and the U.S. will lose about 15,000 jobs.
In summary, senators advocating economic sanctions on China should think carefully. A trade war between the U.S. and China will not contribute to increasing the U.S. GDP (real production changes between −0.07% and 0.54%), driving investments (invest- ment will fall by 0.44%–1.57%), stimulating consumption (prices will rise by 0.13%–0.18%), or increasing domestic employment (3,000–
15,000 jobs will be lost). The only advantage of a trade war is the slight decrease in trade deficit (decreasing by 0.05%–0.45%). As a trade war is good for no one and worse for itself, starting one is completely irrational.